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  • WEBINAR - CIO’s Insights: Beyond projected profits

    Natalie Yiu    Rajeev Thakkar, CFA, Shreenivas Kunte CFA, CIPM
    20 Jun 2019
    22
    0

    Discretionary spending for the future, such as advertising or R&D, is often neglected in analysis of a company. It can, however, be a good indicator of future shareholder returns. (Video: 1 hr 2 min.)
     
  • WEBINAR - Practitioners' Insights: Assessing Emerging Technology Businesses

    Natalie Yiu    Probir Roy, Shreenivas Kunte CFA, CIPM
    19 Jun 2019
    207
    0

    Probir Roy, co-founder of PayMate, talks about how to assess emerging technology businesses, some of which change our lives, but don't make any profits. (Video: 1 hr 2 min.)
     
  • WEBINAR - Career Insights: Wealth Management Industry

    Natalie Yiu    Rajendra Kalur, CFA, Shreenivas Kunte CFA, CIPM
    17 Jun 2019
    24
    0

    What is the value of the CFA charter? Rajendra Kalur, CFA, talks about the value chain in the wealth management industry, key roles and positions, salary levels, and skills and knowledge requirements. (Video: 1 hr 10 min.)
  • Ethics in Practice: Pricing an Initial Public Offering

    13 Jun 2019
    21
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 73)
    Paulson is a portfolio manager at Isaac Investment Advisers, managing four funds that invest in UK equities. In anticipation of an initial public offering (IPO) by the Shore Group, an online retailer of short-term vacation rentals, Paulson conducts extensive research on the company and meets with Shore Group management. He discusses the company and its future prospects with other market participants to gauge the level of interest in the IPO. Along with this research, Paulson relies on his experience of previous IPOs a well as his expertise gained from investing in the specific sector and the wider market to determine a valuation of the new shares. Paulson then discloses his planned order for the stock, including its price limit and its size, with the firm managing the IPO process for Shore Group.
     
    Afterward, he contacts fund managers at competitor firms to suggest that they coordinate their efforts and cap their orders for an allocation of shares at the same price limit. In an email to another fund manager he states, “Some collective bargaining from the buy side is not a bad thing. The fact is there are relatively few funds with reasonable firepower in the small-cap IPOs. To protect our investors, I think we should do more of this — not be bullied by the brokers who say, ‘This is coming at X price! Like it or not.’”
     
    Paulson’s actions are
     
    A. appropriate because he is working to get the best stock price for his clients.
    B. inappropriate because he is trading on material nonpublic information obtained by meeting with company management.
    C. appropriate because he conducted thorough due diligence on the Shore Group IPO.
    D. inappropriate because he shares the confidential information of Isaac Investment Advisers with the firm managing the IPO for Shore Group.
    E. none of the above.

    ANALYSIS
    Paulson’s actions to coordinate with fellow fund managers to affect the price of the Shore Group’s IPO is an attempt at market manipulation. CFA Institute Standard II(B): Market Manipulation prohibits CFA Institute members from engaging in practices that distort prices with the intent to mislead market participants. Paulson’s actions to coordinate with fellow fund managers to affect the price of the Shore Group IPO are an attempt at market manipulation. His actions undermine the proper price formation process of the IPO, which would cause harm to market participants. His actions could cause harm to issuers and existing shareholders because they could result in less capital being raised and existing shareholdings being valued at less than they otherwise might have been.
     
    IPOs play a vital role in helping companies raise capital in the financial markets and are predicated on natural market forces determining pricing. Issuers and investors expect the prices to be fair and reflective of genuine market demand. When investors attempt to undermine this price formation process by artificially driving down the price of an IPO, the efficiency, functioning, and stability of the financial markets are threatened. Paulson has a duty to protect the integrity of capital markets even over his responsibilities to his clients. Meeting with company management is a normal part of the due diligence process.
     
    The facts of the case do not indicate that he received material nonpublic information in meeting with company management. The research Paulson conducts appears to show that he exercised diligence, independence, and thoroughness in analyzing the Shore Group IPO. Sharing the price limit and order size with the firm running the Shore Group IPO is part of the process to determine at what price to offer an IPO by gauging demand from institutional investors. Because the responses do not address market manipulation, choice E is the best response.
     
    This case is based on a February 2019 Enforcement Action by the Financial Conduct Authority.

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org. 
     
  • ESG Integration in Asia Pacific: Markets, Practices, and Data

    Joseph Wong    Matt Orsagh, CFA, James Allen, CFA, Justin Sloggett, CFA,, Anna Georgieva, Sofia Bartholdy
    09 Jun 2019
    1196
    31

    A new report by CFA Institute and Principles for Responsible Investment highlights best practices in ESG integration in six APAC markets: Australia, China, Hong Kong SAR, India, Japan, and Singapore. 

    This report qualifies for 5 CE credits under the guidelines of the CFA Institute Continuing Education Program.
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.
     
  • Ethics in Practice: New Professional Opportunities

    06 Jun 2019
    43
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 72)
    Clemence is a wealth management adviser for DeLaurier Strategic Advisors, where she is responsible for financial planning, portfolio management, estate planning, and general wealth management for more than 400 retail clients. She met many of these clients through her spouse, who is a well-known attorney, and her sister, who is a physician. Clemence decides to resign her position with DeLaurier to take a position at another firm where she will not be expected to generate new advisory clients but will take on more research and investment management responsibilities. She leaves DeLaurier on good terms, providing her supervisor with all the background and information that DeLaurier needs to transition her clients seamlessly to a new account manager. All of her clients have insufficient assets under management to become clients of Clemence’s new firm.
     
    On the day Clemence leaves DeLaurier, she hastily downloads an Excel file listing DeLaurier clients, potential clients, and former clients and sends it to her personal email address. The list includes client names, assets under management, addresses, and phone numbers. Clemence’s intention is to contact her clients as a courtesy to inform them of her new position, thank them for being clients, and express her confidence that DeLaurier will continue to provide them with competent and professional service even though she has left the firm.
     
    Clemence’s actions are
     
    A. inappropriate.
    B. appropriate because she does not use DeLaurier’s client list to benefit her new firm.
    C. appropriate because she is protecting the interests of her clients.
    D. appropriate as long as she only contacts clients who are personal friends to inform them of her new position.
    E. none of the above.

    ANALYSIS
    Clemence has violated her duty of loyalty to her employer by copying the client list and taking it with her to use after she leaves DeLaurier. CFA Institute Standard IV(A): Duties to Employers—Loyalty requires that CFA Institute members act for the benefit of their employer and not divulge confidential information or otherwise cause harm to the employer. The client list is the property of DeLaurier. It contains proprietary confidential information about DeLaurier clients that Clemence is improperly using for her own purposes, however benign those purposes may be. It is clear that Clemence is not motivated to use the client list and information it contains to benefit her new firm and is working with DeLaurier to protect the interests of her former clients and to make them feel comfortable in continuing to use DeLaurier as their financial advisor.
     
    Clemence may contact her former clients who are friends through personal channels, such as social media or a personal contact, but she cannot use DeLaurier’s property to facilitate this communication. As an alternative, she could ask DeLaurier’s permission to take her clients’ contact information so that she might send them a final “thank you” correspondence. In hastily trying to get information regarding her clients, Clemence has actually overreached and taken much more information than intended. She has not only taken information about her clients but also that of the firm’s former, current, and potential clients. Choice A is the best answer.
     
    This case is based on a CFA Institute Professional Conduct enforcement action from 2018 that resulted in a Private Censure.

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org. 
  • Ethics in Practice: Client Cross Trade 

    31 May 2019
    22
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 71)
    Zachary is a portfolio manager for PTM, a large investment management firm with numerous registered investment companies and other clients. Because of market conditions, client investment objectives, portfolio guidelines, liquidations, redemptions, or other reasons, certain PTM clients occasionally need to sell their positions in residential mortgage-backed securities (RMBS). Zachary believes that the securities PTM is required to sell for some clients are good investments at current market prices. So, he wants to move the securities into other PTM client accounts that he believes will benefit from holding the securities he views as desirable. Zachary arranges with broker/dealers to temporarily sell the securities and repurchase them the next business day. The sales are executed based on a single bid for the securities. The repurchases are executed at a small markup over the sale price.
    Zachary’s actions are

    A. acceptable as long as the RMBS investments are suitable for the clients who purchase those securities.
    B. acceptable as long as the markup on the RMBS resale price is reasonable.
    C. not acceptable because he is not acting in the best interests of his clients.
    D. not acceptable if he does not communicate the trading arrangement to his employer.
    E. none of the above. 

    ANALYSIS
    Zachary is not treating all PTM clients fairly when executing the sales and purchases of the RMBS investments for their accounts. CFA Institute Standard III(B): Fair Dealing states that CFA Institute members must deal fairly and objectively with all clients when taking investment action. To meet his responsibilities to his clients, Zachary has a duty to execute trades in a manner consistent with his clients’ best interests. He must follow a trading process that seeks to maximize the value of the client’s portfolio within the client’s stated investment objectives and constraints, and he must primarily consider best prices and consistent liquidity when executing trades.
     
    Zachary prearranges dealer-interposed cross trades in which trading counterparties purchase RMBS from certain PTM advisory accounts; he then resells the securities to other PTM advisory accounts. Zachary’s cross trades are not bona fide, arm’s-length transactions, and do not involve actual transfer of risk to PTM’s broker/dealer counterparties. If risk actually passed from PTM’s clients to PTM’s broker/dealer counterparties, they would incorporate market-based bid–offer spreads. Instead, only a single bid is used as the selling price. By cross trading RMBS at the single bid quoted, rather than at an average between the highest current independent bid and the lowest current independent offer, Zachary favors the buyers over the sellers in the transactions, even though both are advisory clients of PTM. Even if the RMBS investments are suitable for the PTM clients who purchase them, Zachary’s prearranged cross trades are not in the best interest of the selling clients. The size of the markup is not relevant because of the favoritism shown to the clients buying the RMBS. Even if Zachary disclosed the trading scheme to PTM (or to the clients), that would not obviate the need for him to act in the best interest of his clients and to treat all clients fairly. Choice C is the best answer.
     
    This case is based on a US Securities and Exchange enforcement action from September 2018.

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org. 
  • WEBINAR: Practitioners’ Insights - Hospitality industry

    Natalie Yiu    Pavethra Ponniah, CFA, Shreenivas Kunte CFA, CIPM
    30 May 2019
    341
    0

    Pavethra Ponniah, CFA, VP and Sector Head, ICRA Limited, discusses the opportunities and challenges in India's hospitality sector: capital intensive, with long gestation periods, vulnerable to natural disasters and geopolitical developments. (Video: 1 hr)
     
  • WEBINAR: Career Insights - Private equity market in India

    Natalie Yiu    Namit Arora, CFA, Biharilal Deora, FCA, CFA, CIPM
    27 May 2019
    424
    0

    Namit Arora, Managing Partner, IndGrowth Capital, discusses competencies, entry requirements, roles, career paths and opportunities in India's private equity market. (Video: 1 hr 15 min)
     
  • Ethics in Practice: Commodity Trading—Futures Contracts

    24 May 2019
    63
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 70)
    Antron is a commodities trader for a regional bank. He often places customer orders for precious metal futures contracts. Then shortly after placing a customer order, he will place a significantly larger order on the other side of the trade for his personal account. So for example, when a customer order is a “sell” order, Antron places a much larger “buy” order from his personal account. Typically, Antron’s orders for his personal account are placed slightly lower than best price, reducing the likelihood of his order being filled immediately. As soon as the customer order is executed, Antron cancels his personal trade order. Antron’s actions are
     
    A. unacceptable.
    B. acceptable because his clients’ trades are always executed prior to his personal trades.
    C. acceptable if he discloses that he is engaging in a trading strategy for his personal account that is opposite that of his client account.
    D. acceptable because he is acting in the best interests of his clients.
    E. none of the above.

    ANALYSIS
    Antron is engaged in a market manipulation scheme in violation of CFA Institute Standard II(B): Market Manipulation, which prohibits CFA Institute members from engaging in practices that distort prices with the intent to mislead the market. By trading in this manner, Antron is engaging in the practice of “spoofing”: His personal orders, which he routinely cancels, are fake or spoof orders entered with the intent to send false signals to market participants. So for example, by placing spoof orders to buy, Antron sends market participants a false signal of greater demand, creating the impression that the price would likely rise and tricking market participants into executing against his genuine customers’ orders to sell. This causes his customers’ genuine sell orders to be filled sooner, at a better price, or in larger quantities than might otherwise occur. (The risk that the spoof orders could mislead other market participants into believing there was genuine interest in purchasing or selling the specified number of contracts represented by Antron’s spoof orders was so obvious that Antron must have been aware of it.)
    Although Antron’s spoofing practice is boosting returns for his clients’ trades, he is doing so at the expense of the integrity of the market. The order of trading between client orders and those for his personal account is irrelevant. In fact, his personal trades are never executed—an integral part of the spoofing scheme. And because Antron is not following a legitimate trading strategy, disclosure of his strategy to his clients does not legitimize or permit his market manipulation scheme. Choice A is the best answer.
    This case is based on a US Commodities Futures Trading Commission enforcement action from February 2019.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org. 
  • Professionalising Financial Advice

    Piotr Zembrowski, CFA    David McDonald, CFA, CIPM, Mary Leung, CFA, Lisa Carroll, Piotr Zembrowski, CFA, Kurt N. Schacht, JD, CFA
    13 May 2019
    12448
    63

    Following the Hayne Royal Commission, CFA Institute and CFA Societies Australia present policy recommendations on best interest duty, conflicted remuneration, independence of financial advice and the industry culture.

    This publication qualifies for 1.25 CE credits under the guidelines of the CFA Institute Continuing Education Program.
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.
  • WEBINAR: Practitioners’ Insights: Quants factor-based investment decision-making

    Natalie Yiu    Richmond Goldman, Shreenivas Kunte CFA, CIPM
    09 May 2019
    932
    0

    "Quantamental" investment processes entails using multiple factors for conceiving and building robust investment ideas followed by detailed security research to assess the merit for each investment choice. (Video: 1 hr 3 min.)

    This webinar qualifies for 1 CE credit under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to log in to the CE tracking tool to self-document these credits.
  • Ethics in Practice: Artificial Intelligence

    09 May 2019
    49
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    (Week 69)
    Marshall Ng launched his independent investment advisory firm last year. His primary investment tool for managing client accounts is an artificial intelligence (AI)-based model that seeks growth investment opportunities while minimizing excessive risk. Over the past decade, Ng honed his quantitative and computer-modeling skills as the lead technologist for a hedge fund. His AI model makes all investment decisions and submits trading requests without any interactions from Ng. To validate the model’s operations, he regularly reviews his clients’ return performance as well as traditional risk metrics.
    Ng is constantly seeking new sources of data for his model. Each new source is back tested against the initial model design and its current sources. Those new sources that strengthen the model’s goals are subsequently incorporated into the live model.
    Following the addition of the newest data source addressing market sentiment, the model’s results became extremely volatile and its risk metrics increased significantly. Ng believes the volatility and increased risk metrics will be short lived and will ease as the model learns to apply the new data effectively. He is partially correct — the return volatility stabilizes over the next six months, but the risk metrics remain above desired values.
    Ng’s decision to use an AI-based model to select investments is

    A. inappropriate if he does not understand the basis for the AI model’s investment and trading decisions.
    B. inappropriate if he does not retain the appropriate documentation to support the AI model’s investment decisions.
    C. inappropriate if he does not communicate to his clients the continuing updates to the AI model.
    D. all of the above.
    E. none of the above. 

    Analysis
    Technological changes are a consistent part of the investment management industry. From the time that computers began replacing calculators and journal ledgers, the industry has used technology to develop practices and techniques that enhance research and trading efficiency. Although artificial intelligence is just the latest iteration of the ongoing advancement of technology, fundamental ethical norms must be applied to its use to ensure that investors’ interests continue to be protected.

    CFA Institute Standard V(A): Diligence and Reasonable Basis requires CFA Institute members to exercise diligence, independence, and thoroughness as well as have a reasonable and adequate basis supported by appropriate research for taking investment action. In the realm of Al-based decision making, all decisions are made within the programmatic platform. Ng reviews the model’s performance and risk metrics, but it is unclear from the facts if his validation of the decisions is grounded in sufficient research.

    CFA Institute Standard V(C): Record Retention requires CFA Institute Members to develop and maintain appropriate records to support their investment actions. But in Al-based decision making, the process and information used to arrive at specific decisions are within the programmatic platform. From the information provided, it is unclear what, if any, processes are in place to support appropriate decision-based record retention.

    CFA Institute Standard V(B): Communication with Clients and Prospective Clients requires CFA Institute members to describe the basis of the investment process. This information allows clients to make informed decisions about engaging with an investment adviser. With AI, the investment decision-making process continues to “learn” and evolve as data are provided to the programmatic platform.
    Ng’s introduction of the new sentiment data transforms the initial model used for back testing into the evolved model used in practice. The question, then, is whether the program’s “learning” process is considered a significant change to the investment process that needs to be disclosed to clients. Individuals researching investment options certainly rely on many sources of information. But a human’s ability to consume data is not as great as that of an AI-based model. The outcome described here of the introduction of a new data source demonstrates the model’s potential sensitivity to new factors. It is unclear from the facts if Ng’s clients have been informed of these changes.

    Although the use of AI represents an advancement in investment management, all of these considerations must be addressed in some manner as they relate to ethical practices that protect investors. Choice D is the best answer.
    To better understand these and similar concerns, the CFA Institute Standards of Practice Council (SPC) issued a consultation seeking input from CFA Institute members and other industry participants who are using or researching AI techniques. The SPC will consider the responses received in the development of future guidance on the Code of Ethics and Standards of Professional Practice.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org. 
  • WEBINAR: Career Insights - Alternative Investment Funds in India

    Natalie Yiu    Biharilal Deora, FCA, CFA, CIPM, Shreenivas Kunte CFA, CIPM
    25 Apr 2019
    657
    0

    The fast growth of the alternative investments space in India offers a diverse investment management roles in research, fund management and product development. (Video: 1 hr 5 min.)


    This webinar qualifies for 1 CE credit under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to log in to the CE tracking tool to self-document these credits.


     
  • WEBINAR: Practitioners’ Insights - ETFs, smart beta and the evolving investment landscape

    Natalie Yiu    John Davies, Shreenivas Kunte, CFA, CIPM
    25 Apr 2019
    1573
    0

    Exchange-traded funds are disrupting active fund management by democratizing investing. They provide affordable access to asset classes, countries and strategies that used to be available only to large institutions. (Video: 1 hr 15 min.)

    This webinar qualifies for 1 CE credit under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to log in to the CE tracking tool to self-document these credits.
     

  • WEBINAR: Career Insights - Structured Finance

    Natalie Yiu    Ashwin Narang, CFA, Shreenivas Kunte, CFA,CIPM
    25 Apr 2019
    1936
    0

    Growing interest in structured finance in India is creating career opportunities for finance professionals, especially in mezzanine financing. (Video: 1 hr 5 min.)

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to log in to the CE tracking tool to self-document these credits.

  • Ethics in Practice: Client Agreement Terms

    25 Apr 2019
    33
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    (Week 68)
    McMaster is the founder and sole director of Dover Financial Services, a financial services business that sells financial products and provides clients with financial product advice. McMaster directs Dover’s numerous authorized representatives to incorporate the “Dover Client Protection Policy” as part of the contracts with their clients that set forth the terms for providing financial advice. The protection policy states that it “contains a number of client protections designed to ensure that you (the client) receive the best possible advice and the maximum protection available under the law.” The protection policy’s terms are intended to excuse Dover and its authorized representatives from various liabilities arising from their failure to act in a client’s best interest, relieve Dover and its authorized representatives of their duty to conduct suitability analyses of clients and investments, and inaccurately lead clients to believe that they cannot make claims against Dover or its representatives for securities law violations.
    McMaster’s actions are

    A. appropriate because Dover and McMaster fully disclosed the terms of the Dover Client Protection Policy to clients.
    B. appropriate because Dover and McMaster are free to negotiate the terms of advisory agreements with clients.
    C. appropriate so long as the Dover Client Protection Policy did not misrepresent a client’s legal rights.
    D. inappropriate.
    E. none of the above.

    ANALYSIS
    This case relates to the obligation of investment advisors to act in their clients’ best interests. CFA Institute Standard III(A): Loyalty, Prudence, and Care sets forth a duty of loyalty on the part of CFA Institute members for their clients, and requires them to act for the benefit of their clients and place their clients’ interests before their own. Other CFA Institute standards require members to provide diligent, independent, and thorough advice as well as have a reasonable and adequate basis for investment action [Standard V(A)], conduct a suitability analysis for any investment recommendation to their clients [Standard III(B)], and not make any misrepresentations relating to investment services [Standard I(C)]. Taken together, these components of the CFA Institute Code of Ethics and Standards of Professional Conduct define the fundamental principles applicable to investment professionals and detail what conduct investors should expect from their financial advisers. The terms of the Dover Client Protection Policy improperly attempt to “disclose away” Dover and McMaster’s fundamental ethical (and very likely legal) obligations to clients by limiting liability for failures to act in the client’s best interest or provide appropriate advice.

    Although in general clients and advisers are free to negotiate the terms of advisory agreements, it is improper for advisers to use the client agreement to create a significant imbalance in the rights and obligations of the adviser or limit the fundamental ethical obligations of loyalty, prudence, and care to their clients. Disclosure does not cure such conduct. Furthermore, the Dover Client Protection Policy was deceptive in that it misrepresented the client’s right to bring legal action for ethical and regulatory violations and falsely gave the impression that a client would benefit from its terms. Choice D is the best answer.

    This case is based on a June 2018 regulatory action by the Australian Securities and Investments Commission.
     


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org. 
  • Artificial intelligence and its potential impact on the CFA Institute Code of Ethics and Standards of Professional Conduct: A consultation

    Piotr Zembrowski, CFA    Julia Bonafede, CFA, Corey Cook, CFA, Glenn Doggett, CFA
    23 Apr 2019
    1964
    43

    Artificial intelligence has the potential to impact the ethical foundations of the investment profession. CFA Institute is seeking input on how its Code of Ethics and Standards might reflect the increased use of the technology.

    This article qualifies for 1.0 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 
  • Ethics in Practice: Use of Client Trading Information

    18 Apr 2019
    19
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    (Week 67)
    Kapadia is a trader for a asset management company that manages several large global mutual funds. Kapadia executes the equity buy-and-sell orders for the portfolio managers of one of the company’s mutual funds. He has discretion to execute the orders at any time during the day depending on market conditions. Prior to executing the orders, Kapadia contacts several close friends and relatives to provide them with information on what securities are set to be traded by the mutual fund. In turn, they make trades that mirror the imminent trades to be executed by Kapadia on behalf of the mutual fund. Kapadia’s actions are

    A. inappropriate.
    B. appropriate if he disclosed his actions to his employer or to the mutual fund.
    C. appropriate because he did not share confidential information about individual clients.
    D. inappropriate only if the client was harmed financially by the conduct.
    E. none of the above. 

    ANALYSIS
    This case relates to the unethical and often illegal practice of front-running, or trading on advance information for one’s personal account prior to trading for client accounts to gain an economic advantage. CFA Institute Standard VI(B): Priority of Transactions states that investment transactions for clients must have priority over investment transactions for personal benefit. In this case, Kapadia facilitated the front-running by his friends and relatives on the trades of his employer’s mutual fund. Although Kapadia may not have directly benefited financially, he benefited personally by providing the information to those with whom he had close relationships. This practice is unethical and inappropriate even if the trades of his friends and relatives did not disadvantage the mutual fund by moving the price of the security or causing the fund to lose the price advantage or any profit from its own trades. Kapadia cannot cure this unethical behavior by disclosing his actions to his employer or the fund. Although Kapadia did not share the confidential information of individual clients or individual investors of the fund, he did share confidential information about the fund itself. Choice A is the best answer.
    This case is based on a 2016 enforcement action by the Securities and Exchange Board of India.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org. 
  • Understanding the Investment Fundamentals of Real Estate Investment Trusts (REITS). A part of the series "Sector Analysis: A Framework for Investors"

    Joseph Wong    Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan
    15 Apr 2019
    18960
    541

    INTRODUCTION TO SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

    The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

    Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

    To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

    This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 
     
    REAL ESTATE INVESTMENT TRUST (REIT) SECTOR 

    REITs are vehicles that own and typically operate a portfolio of income-yielding real estate assets. Modelled along the lines of unit trusts, REITs allow for funds to be pooled from a group of investors. Such a structure provides retail investors with several advantages: a low-hurdle of entry and exposure to a diversified pool of real estate assets with a high level of liquidity, which would not otherwise be possible with direct investing. 

    Most REITs are publicly listed, and declare above 90% of their earnings as dividends to fulfil certain benefits accorded to REITs by the local securities regulator. As such, REITs provide a stable source of recurrent income, which serves as a yield play rather than an investment avenue for reaping capital gains. We believe an effective and accurate fundamental analysis can help the retail investor determine if the recurrent income is stable and/or trending upwards over the long term. 

    A REIT generally focuses on a specific category of property for investments.  Some common classifications of REITs include: Office & Commercial REITs, Retail REITs, and Industrial REITs.

    To read more, download the full sector analysis for REITs with accompanying question bank below.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
     
  • Understanding the Investment Fundamentals of the Telecommunications Sector. A part of the series "Sector Analysis: A Framework for Investors"

    Joseph Wong    Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan
    15 Apr 2019
    36327
    420

    For investors exploring the telecommunications sector, it is important to be aware of the key economic, operational and regulatory factors influencing these firms. These not only vary from country to country but also from company to company, depending on the kind of service that is being provided – fixed line, mobile or a combination of the two. Common to all are the opportunities afforded by the growth in data and the proliferation of online services. For operators in developing markets, lower penetration rates offer long-term opportunities. Meanwhile for operators in the  developed world, staying relevant by keeping pace with technological advancements is vital. In general, the sector is marked by intense competition, hefty capital expenditure requirements (at least historically) and rigorous regulatory intrusion.

    There are three listed telecommunication stocks in the FTSE ST All-Share index, with a net market capitalisation of S$28.6 billion, and they accounted for 7.5% of the index as at 31 Jan 2018*. Of the three, SingTel is the largest constituent  company, representing about 90% of the Singapore telecommunication sector by market capitalisation.

    The sector analysis for REITs can be found on ARX here: https://www.arx.cfa/post/Understanding-Real-Estate-Investment-Trusts-REITS-Sector-Analysis-A-Framework-for-Investors-5166.html 

    To read more, download the full sector analysis for the telecommunications sector with accompanying question bank below. 

    This publication qualifies for 0.5 CE credits under the guidelines of the CFA Institute Continuing Education Program.
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.  
  • Understanding the Investment Fundamentals of Airlines. A part of the series "Sector Analysis: A Framework for Investors"

    Joseph Wong    Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan
    15 Apr 2019
    72890
    756

    INTRODUCTION TO AIRLINE SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

    The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

    Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

    To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

    This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 

    AIRLINE INDUSTRY

    Perhaps it’s the thrill of voyaging to a far-flung, unfamiliar place. Maybe it’s the teasing prospect of a seat or—even better—an earnings upgrade. Whatever our reasons, we remain seduced and frustrated by the airline industry.

    In a 2007 letter to shareholders, Warren Buffett observed that: The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money—think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.

    In the beginning, airlines were a must-have sovereign accessory, an essential strategic asset with monopoly powers that conferred national pride and international prestige. That said, packing a soft-power punch wasn’t cheap, and the industry was replete with loss-making state-owned companies.
    To the relief of investors (and taxpayers), economic sanity eventually prevailed and privatisation, together with the introduction of low-cost carriers (LCCs), helped to forge a
    more sensible trading environment.

    Old habits die hard, though, and aspects of a state-owned past haunt the airline industry. Intergovernmental deals dictate which airlines can fly and where they can land, and despite cheaper alternatives, national airlines still locate their hubs on their home turf. Industry pricing is also quixotic: a flight with two stopovers may be 40% cheaper than a shorter, more fuel-efficient, direct journey.
     
    To read more, download the full sector analysis for the airline industry with accompanying question bank below.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.  
  • Understanding the investment fundamentals of the insurance sector.

    Joseph Wong    Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan
    15 Apr 2019
    19928
    290

    A part of the series "Sector analysis: A framework for investors", created to help investors undertake proper due diligence on insurance companies, a well-established sector which nevertheless does not escape forces of technological disruption.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.  
  • Understanding the Investment Fundamentals of the Banking Sector. A part of the series "Sector Analysis: A Framework for Investors"

    Joseph Wong    Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan
    15 Apr 2019
    10372
    396

    INTRODUCTION TO SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

    The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

    Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

    To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

    This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 
     
    THE BANKING SECTOR

    In earlier editions of the Sector Analysis series, we explored the Real Estate Investment Trust (REIT) business model and the Telecommunications sector. In this article, we examine banks and highlight the various factors and lines of enquiry that will help you make informed investment decisions.

    SPHERES OF OPERATION

    The role banks play in our lives is vital. Their activities underpin the efficient working of an economy – indeed, they are often among the most significant constituents of a country’s stock market. When we talk about banks, we are not just referring to the familiar branches we occasionally visit to deposit funds or withdraw cash. Banks is an umbrella term that describes an industry subdivided into several segments, including, but not restricted to Consumer Banking & Wealth Management (also known as retail banking), Wholesale (also known as institutional banking) and Treasury.

    To read more, download the full sector analysis for the Banking Sector with accompanying question bank below.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.  
  • Understanding the Investment Fundamentals of the Property Development Sector. A part of the series "Sector Analysis: A Framework for Investors"

    Joseph Wong    Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan
    15 Apr 2019
    21351
    508

    INTRODUCTION TO SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

    The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

    Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

    To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

    This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 

     
    THE PROPERTY DEVELOPMENT SECTOR - LUMPS, BUMPS AND SLUMPS

    In a complex and fast-moving financial world, it’s comforting to know that some sectors remain relatively easy to understand. A case in point is property development. The property developer acquires land and an architect then designs the building and obtains planning approval before passing the baton to the construction team. 

    At this stage, the developer could choose to undertake marketing and sales before construction is complete or wait until the last brick falls into place. Either way, you can then calculate the gross development value (GDV) of a project or profit from the project, of which the sum of GDV, excluding the developer’s liabilities, will yield the value of the development.

    To read more, download the full sector analysis for the Property Development Sector with accompanying question bank below.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.  
  • Understanding the investment fundamentals of the palm oil industry

    Joseph Wong    Eunice Chu, ACCA, Clara Melot, Joyce Lam, Alan Lok, CFA, Guruprasad Jambunathan
    15 Apr 2019
    2505
    181

    Part of the series "Sector analysis: a framework for investors"

    From cooking oil to biofuel, to the oleochemicals used in food additives, soaps, cosmetics, lubricants, and textiles, palm oil and its refined derivatives touch our lives in many ways. Given the commodity’s ubiquity, we decided to perform some extraction of our own, and provide insights into the factors and dynamics to consider when analysing companies involved in the production of palm oil.

    The report contains a full sector analysis for the palm oil industry and a question bank. 

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.  

     
  • Understanding the investment fundamentals of the logistics sector

    Joseph Wong    Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan
    15 Apr 2019
    1848
    180

    A part of the series "Sector Analysis: A Framework for Investors", generated to help investors undertake proper due diligence on companies in the rapidly evolving logistics sector that is a back-bone of today's supply-chain system.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.
  • Understanding the investment fundamentals of the gaming sector

    Joseph Wong    Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan
    15 Apr 2019
    1742
    135

    A part of the series "Sector Analysis: A Framework for Investors", generated to help investors undertake proper due diligence on companies operating in the highly regulated, heavily taxed and competitive gaming industry.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.

    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.
  • Understanding the investment fundamentals of the education sector

    Joseph Wong    Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan
    15 Apr 2019
    231
    34

    A part of the series "Sector Analysis: A Framework for Investors", generated to help investors undertake proper due diligence on companies in the private education industry.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.

    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.
  • Ethics in Practice: Corporate Disclosure

    11 Apr 2019
    38
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    (Week 66)
    Huang is the CEO and an executive director of GLB Group, a diversified company engaged in the business of securities investment and finance. The company’s shares have been listed on the Stock Exchange of Hong Kong (SEHK) for the past two decades. Huang circulates the unaudited financial statements for the past fiscal year to the company’s board of directors. The financial statements show a substantial increase in profitability over the previous fiscal year. Shortly after Huang provides this information to the board of directors, dramatic movements are seen in the trading volume and price of GLB stock.
    Relying on his obligation under the CFA Institute Code of Ethics and Standards of Professional Conduct to keep employer information confidential, act with diligence, and have a reasonable and adequate basis for investment actions, Huang decides to wait for the audited financial statements to be prepared before releasing the statements publicly. Three weeks later, after the audited financial statements are ready, GLB issues a profit alert that states GLB expects a sharp turnaround of its results for the year, mainly attributable to the substantial net gains of its investments. Following publication of the profit alert, the share price of the company jumps 24%.
    Huang’s actions are

    A. inappropriate.
    B. appropriate because the unaudited financial statements are confidential GLB information.
    C. appropriate because he waited for the financial statements to be finalized prior to making a public disclosure.
    D. appropriate if he cautioned the directors not to share the information publicly.
    E. none of the above. 

    ANALYSIS
    This case relates to knowledge of regulations relating to the disclosure of corporate information. CFA Institute Standard I(A): Knowledge of the Law states that CFA Institute members must comply with all applicable laws governing their professional activities and, in the event of a conflict, must comply with the more strict law. Because GLB’s stock is listed on the SEHK, the rules and regulations governing that exchange are applicable to it and to Huang. Securities Futures Ordinance Section 307 requires that, once information related to fiscal year performance comes to the knowledge of a company, the information must be publicly disclosed to the market as soon as reasonably practicable.
    In this case, the disclosure did not take place until several weeks later. Failure to ensure timely disclosure resulted in a breach of SEHK regulations. Huang waited to receive the finalized financial statements before making an announcement, thinking his actions were appropriate in fulfilling his duties under the CFA Institute Code of Ethics and Standards of Professional Conduct. Even if this was a proper interpretation of his responsibilities under the standard, the legal requirement of prompt disclosure, as the stricter rule, trumps the provisions of the applicable CFA Institute standards. Choice A is the best answer
    This case is based on a November 2018 enforcement action by the Hong Kong Securities and Futures Commission.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org. 
  • Ethics in Practice: Use of Subadvisers

    03 Apr 2019
    56
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    (Week 65)
    Reeves is the CEO and founding partner of Luxor Asset Management. Reeves provides asset management and allocation services for high-net-worth individuals and a number of small institutional clients. His services include investing client funds with third-party subadvisers who have a specialty in a particular asset class. Reeves’ clients are aware of and approve Luxor’s allocation of their assets to subadvisers. The third-party subadvisers make payments to Luxor based on the total amount of a client’s assets placed or invested in certain subadviser funds. Reeves initially sought to negotiate a direct economic benefit for clients, but the subadvisers would not agree and payments were made directly to Luxor. Reeves’ actions are

    A. appropriate because Reeves has disclosed the use of subadvisers.
    B. inappropriate unless Reeves discloses the financial arrangement with the subadvisers to his clients.
    C. appropriate if the clients receive the ultimate benefit of the subadviser payments in the form of discounted Luxor fees.
    D. inappropriate because the payments are an improper referral fee.
    E. none of the above.

    ANALYSIS
    This case relates to conflicts of interest between an advisor and clients. CFA Institute Standard VI(A): Disclosure of Conflicts requires CFA Institute members to make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with their duties to their clients. The payments by subadvisers to Luxor based on the amount of client assets that Luxor places with the subadvisers create a potential conflict of interest because it incentivizes Reeves to hire those subadvisers that pay the fee to Luxor, but who may not necessarily be the best subadvisers for his clients. Reeves could mitigate the conflict by passing on any economic benefit received from the subadvisers to his clients.
    Reeves initially attempted to negotiate a direct benefit for his clients, but his proposal was rejected by the subadvisers. And it is not clear from the facts that Reeves is ultimately passing the benefit on to his clients. Even if that were the case, Reeves should disclose the source and nature of the discount to clients. Reeves has disclosed Luxor’s use of subadvisers, but it seems the financial incentive for Luxor has not been disclosed. Although referral arrangements may be acceptable with full disclosure to clients, Reeves is not referring clients to the subadvisers but hiring them directly on his clients’ behalf. Choice B is the best answer.
    This case is based on a December 2018 enforcement action by the US SEC.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org. 
  • PRACTITIONER’S BRIEF: What motivates distressed companies to acquire?

    22 Mar 2019
    767
    58

    A practitioner's brief exploring the rationale behind acquisitions made by distressed firms. Based on the paper “Why Do Distressed Firms Acquire?” by Eden Quxian Zhang, lecturer in banking and finance at Monash University.
  • Ethics in Practice: Political Expression 

    22 Mar 2019
    36
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    (Week 64)

    Ziegenthaler is an analyst and trader for a large global asset management firm. The president and CEO of the firm is a legendary figure in the investment industry and appears regularly on global financial television programs as a commentator. Videos of these appearances routinely show the CEO sitting in the firm’s trading room with the traders’ workstations featured in the background. Ziegenthaler’s workstation and computer screen are often clearly visible during the CEO’s television appearances.
    In addition to working as an analyst for the firm, Ziegenthaler is a passionate supporter of an animal rights organization that protests the use of animal fur and hides by the fashion industry. During the CEO’s next television appearance, and unnoticed by the program’s producers, Ziegenthaler pulls up a graphic anti-fur poster on her computer screen so that it can be seen by viewers. Several of the firm’s clients, including members of the family of a prominent fashion house, are offended by the graphic and complain to the firm. Ziegenthaler’s actions are

    A. inappropriate because she was using employer resources without permission.
    B. inappropriate because her actions reflected poorly on her professional reputation or integrity.
    C. appropriate because she is free to express her personal views on a topic unrelated to work.
    D. appropriate because her actions did not cause financial harm to her employer.
    E. none of the above.  

    ANALYSIS
    This case relates to the professional conduct of an investment professional and her duty to her employer. CFA Institute Standard of Professional Conduct IV(A): Loyalty (to employer) requires CFA Institute members to act for the benefit of their employer and not cause harm to their employer. In addition, Standard I(D): Misconduct states that CFA Institute members must not commit any act that reflects adversely on their professional reputation or integrity. As a general matter, investment professionals are free to voice and act on their political beliefs outside of their work environment. Standard I(D) is not meant to curtail freedom of expression or address conduct (or even acts of civil disobedience) in support of personal beliefs as long as that conduct does not reflect poorly on the member’s professional reputation or competence.
    Ziegenthaler’s beliefs related to animal rights, in and of themselves, are not related to her professional competence and do not reflect poorly on her reputation or integrity. But in this case, Ziegenthaler surreptitiously uses resources and a platform made available to her through her employer to express and promote her views. These actions caused her employer at least some reputational harm with its clients, as evidenced by their complaints. As a result, Ziegenthaler’s actions are inappropriate. Choice A is the best answer.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org. 
  • 2018亚太金融科技概览

    19 Mar 2019
    699
    24

    引言

    自CFA Institute 关注金融科技以来,如何定义金融科技的问题就一直存在着争议。

    不同的定义反映出人们不同的关注点与诉求。过去的几年中,我们所关注和研究的思路和目标一直在不断的变化。我们对于金融科技的定义也在不断更新。

    早年的经验

    在商业领域,人们总是矢志不渝地探寻尖端领域。正如 2016 年开始关注金融科技的研究一样,我们敲开了一扇令人激动而神秘的大门。

    彼时我们的目标是回答CFA 持证人的疑问:金融科技是否会取代自己?如果答案是肯定的,那么多久会发生?我们采访了许多该领域的从业人员,他们一致认为金融科技给行业带来的影响是:颠覆、颠覆、颠覆。

    我们很快就意识到我们参与的价值所在。当时金融科技还是一个全新的概念,所谓的“意见领袖”大多来自金融科技初创企业。颠覆性的观点反映出他们的使命,也是他们战斗的口号。但其中缺少了在金融科技生态系统中两个重要的利益相关方,即金融机构,以及可能更重要的监管机构。

    随着大家对金融科技生态系统理解的不断加深,我们曾在 2016 年 5 月的一篇文章中指出:“金融科技公司最理想的发展路径是与银行合作。”我们的这一判断包含了两层含义:
    1. 金融机构和技术创新者都具备着对方难以复制的技能,因此,对他们而言,最好的机会是共同合作,双方都关注于自身的强项。
    2. 事实证明,对于大多数金融科技初创企业来说,“企业对消费者”(B2C)模式的成本太高;

    相反,“企业对企业”(B2B)模式则是初创企业唯一的机会。换句话说,初创企业通过提供技术方案与金融机构合作,这种模式更为现实。

    在随后的两年中,我们的观点被多次证明是正确的,我们与该领域的从业者交流时对此感受颇深。对我们而言,最有趣的案例就是微软同华夏基金的合作(中国顶级公募基金之一)。2017 年夏,二者宣布在投资和投资顾问方面展开深入合作,这些领域都非常接近我们此前论述的核心。随后,几乎所有中国大型银行均与主要合作伙伴签订了类似协议。2018 年1 月,沃伦·巴菲特的伯克希尔哈撒韦公司宣布与亚马逊和摩根大通合作,共同进军在线医疗保险领域。

    可期的未来

    之前,我们对金融科技的定义是金融领域的新技术,主要是指区块链、智能投顾、移动支付与P2P 贷款

    目前,这一定义已经远远不能涵盖我们所讨论的内容。因为我们发现,上述新业务并非对传统业务构成威胁,而是对传统业务形成了有益的补充。我们怀着开放的心态去拥抱金融科技,这样一来,金融行业及金融机构便可以具备竞争优势。

    具体来看,大约一年前,我们就已经开始着手人工智能、大数据、云计算、区块链方面的研究,探究其对金融服务所产生的潜在影响,特别是在亚太地区的主要金融市场中贷款、支付、智能投顾以及保险这四大领域所受的影响如何。因而,目前我们对“金融科技”的定义粒度更细,包括“金融”与“科技”的多个方面。

    在过去的一年中,我们采访了很多服务于金融机构、技术创新公司、监管机构、投资者以及研究机构的专家,这本书就是我们合作努力的结果。全书的主要结论如下(剧透警报!):

    人工智能、大数据、云计算的发展使得拥有优势技术资源的团队领先没有技术资源的团队;
    区块链或将对金融机构未来的运营方式产生深远影响。但鉴于该技术尚未成熟,在形成可持续商业模式、获得监管部门批准方面仍存在许多障碍需要克服;

    中国在亚太地区金融科技领域的发展中处于领先的位置,在人工智能、大数据、云计算区块链领域均有涉及。而在其他亚太市场,金融科技目前仍仅局限于另类贷款、移动支付、智能投顾等;

    前瞻

    就在本书付梓之前,我们收到了2018 年普华永道独角兽CEO 调查的结果。调查表明,54% 的受访高管相信,合作是成功的关键;而只有23% 的高管认为内部开发是更好的方式。

    此外,近期普华永道发布的另一份报告中,研究人员发现,与此前广受欢迎的B2C 模式相比,当下采取B2B 模式的企业将成为主流。

    这听起来是不是有点耳熟?很高兴,我们正在正确的道路上前进。再次鸣谢所有对本卷顺利出刊做出贡献的人们。

    1曹实,CFA.FinTech以及金融业的未来.信报,2015. http://startupbeat. hkej.com/?p=29681
    2 FinTech 2017: China, Asia, and Beyond, CFA Institute, May 2017, p.3.
    3 https://www.pwccn.com/en/research-and-insights/pwc-unicorn-ceo-survey-2018.html
    4 https://www.pwccn.com/en/services/consulting/publications/new-trends-technology-enabling-to-b-services-whitepaper.html
     
    This publication qualifies for 2.5 CE credits under the guidelines of the CFA Institute Continuing Education Program.
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.  
     
     

     
  • 交易所交易基金(ETF)综合指南

    Joseph Wong    Joanne M. Hill, Dave Nadig, Matt Hougan
    19 Mar 2019
    885
    18

    简介:为什么交易所交易基金会增长?
     
    本书旨在帮助投资者了解和使用交易所交易基金(ETF)。ETF的引入只有25年左右,但现在已经成为投资管理业务增长最快的领域。本书详细介绍了ETF的运作方式、其独特的投资和交易特性,以及它们如何运用于投资组合管理。此外,还详细说明了评估ETF的最佳方式,以确定适合任何特定投资
    或交易目标的正确基金。
     
    交易所交易基金让投资者能以很高的流动性进入金融市场的几乎每个角落,允许任意规模的投资者建立起管理费远低于典型共同基金的机构级投资组合。持仓状况和投资策略高度透明,有助于投资者轻松评估ETF的潜在回报和风险。
     
    本质而言,ETF是混合投资产品,融合了共同基金的许多投资特点与普通股票的交易特点。像共同基金一样,投资者买入ETF的股份,按比例拥有资产池的权益。像共同基金一样,ETF通常由投资顾问收取一定费用进行管理,并受1940年《投资公司法》的监管。但与共同基金不同的是,ETF股票在
    全球证券交易所的连续市场上交易,可以通过经纪账户进行买卖,并且在整个交易日都拥有连续定价和流动性。因此,它们能够以保证金持有、出借、卖空或用于资深股票投资者采用的任何其他策略。
     
    虽然也存在一些可在交易所交易的其他类型共同基金,尤其是传统的封闭式基金,但今天的ETF与它们截然不同。ETF通常在每一个交易日开市时披露自己的持仓情况,因此潜在的买家和卖家可以通过与标的资产的价格比较,评估交易的ETF价格。专业交易商可以在一天结束时,以净资产价值创设和赎回份额,这是一个有助于保持ETF市场价格与“公允价值”相一致的特性。
     
    截至2014年第1季度末,共计1,570只ETF在美国上市,管理资产总额近1.74万亿美元。2013年,ETF占所有共同基金资产的比例由十年前的2%增至超过11%,并且继续吸引个人和机构投资者资产。更令人印象深刻的是,在任何一天,ETF通常都会占到美国交易所美元总成交量的25%至40%。
     
    简而言之,在20年里,这些创新的金融产品已经从新生事物,变成塑造投资者的投资方式和市场自身运行的最重要因素之一。持续增长前景十分向好。在截至2013年的四年中,ETF分别吸引了1880亿美元、1880亿美元、1190亿美元和1220亿美元的净流入。2013年第3季度末,美国证券交易委员会登记了近1000只新ETF。最近,PIMCO等共同基金巨头已经强势进入ETF领域,而包括富达、T. Rowe Price和Janus在内的其他公司也向美国证券交易委员会递交了申请。从贝莱德到麦肯锡等公司的专家都预计,其整体资产将会在短期内翻一番。在第14章中,我们将从投资者应用和产品开发的角度,详细介绍ETF的未来。
     


    This publication qualifies for 5.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.  
  • Dual-Class Shares: The Good, The Bad, and The Ugly

    19 Mar 2019
    39392
    305

    A Review of the Debate Surrounding Dual-Class Shares and Their Emergence in Asia Pacific
  • Ethics in Practice: Mortgage-Backed Securities Credit Ratings

    14 Mar 2019
    42
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    (Week 63)

    Dukes is a managing director at a global credit ratings service. She leads and is responsible for the actions of the group that assigns new issue and surveillance credit ratings to commercial mortgage-backed securities. To determine the ratings, Dukes and her group calculate the debt service coverage ratio (DSCR) of each security, a key quantitative metric used to rate commercial mortgage-backed securities. Shortly after the global financial crisis, the ratings agency changed the methodology for calculating the DSCR for certain securities. Dukes’ group published future credit ratings without disclosing the change. Using the new methodology, the securities received higher credit ratings than they would have received if the original methodology had been used. Dukes’ actions are

    A. inappropriate because she did not have a reasonable and adequate basis for changing the methodology.
    B. appropriate because the new methodology more accurately reflects risk.
    C. inappropriate because she did not disclose the change in methodology to the investing public.
    D. appropriate because no disclosure is necessary because calculating DSCR is only one element in determining the overall rating of the security.
    E. none of the above.

    ANALYSIS
    This case involves the ethical principles applicable to communication with investors. CFA Institute Standard V(B): Communication with Clients and Prospective clients requires CFA Institute members to disclose to investors the basic format and general principles of the investment process they use to analyze investments and promptly disclose any changes that might materially affect those processes. Rating agencies’ consistency and transparency are important to investors. Without the consistent application of rating methodologies, ratings may not be readily comparable. Similarly, without transparency, investors can neither assess the methodologies used by the credit ratings agency nor the application of those methodologies, and thus cannot determine what weight to give the rating. Dukes should have disclosed to investors the change in methodology for calculating DSCR.
    Although it would be inappropriate to change the methodology without a reasonable and adequate basis, the facts do not indicate that Dukes failed to use diligence or have a reasonable basis for the change. In addition, the facts do not indicate whether the new methodology more accurately reflects risk; however, even if the new methodology does more accurately reflect risk, the change still must be communicated to investors. DSCR is clearly a “key quantitative metric” used to rate the securities because the change in methodology materially affected the credit ratings by moving them higher than the original method. Choice C is the best answer

    This case is based on a December 2018 enforcement action by the US SEC.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org. 
  • Ethics in Practice: Counterparty Risk

    08 Mar 2019
    50
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 62)
    Gostkowski is an analyst for Banner Investment Management (Banner). Banner’s most significant line of business is its repurchase agreements (repo) program, which offers investment advisory clients the opportunity to invest in loan portfolios with portions of loans guaranteed by various government entities, including the US Department of Agriculture (USDA). Banner markets the program as a higher-yield alternative to money market accounts. Banner discloses to clients and regulators that it conducts initial and ongoing due diligence and monitoring of repo counterparties, including the counterparties’ financial condition.
    As part of these reviews, Gostkowski uses a checklist of the documents he needs to obtain from repo counterparties. The checklist includes certain financial information, including annual audited financial statements. But Banner does not provide any written guidance for Gostkowski regarding its practices for addressing material or problematic information.
    During the course of the repo program, Banner begins using Farmers First Financial (Farmers First) as a repo counterparty. Initially, Farmers First provides Gostkowski only unaudited financial statements. Farmers First tells Gostkowski that it is in the process of hiring a new auditor to audit its financial statements and says it will be filing for an extension on submitting the required filings. During his initial due diligence, Gostkowski conducts a background check on Farmers First and its principals. Gostkowski discovers that the Farmers First CEO has not graduated from college, has a poor credit history, has pleaded no contest to assaulting a police officer, has been convicted of two charges of driving under the influence, and has been sued multiple times for breach of contract. Gostkowski does confirm Farmers First’s status as an approved USDA lender, but he does not attempt to verify other representations made by Farmers First or contact its references. Gostkowski is informed by Banner’s legal counsel that the USDA should honor its guarantee unless Banner had actual knowledge that Farmers First had participated in fraud or misrepresentation.
    When Gostkowski eventually receives the audited financial statements from Farmers First, they contain discrepancies with the unaudited financial information provided during the initial due diligence. Gostkowski also cannot find evidence that the auditor listed on the Farmers First financial statements exists. Gostkowski conducts an on-site visit at Farmers First’s offices and finds no evidence that the firm has five to seven employees, as claimed in its initial disclosures. Gostkowski also cannot locate the purported underlying borrowers for several of Farmers First’s loans. The USDA eventually confirms to Gostkowski that a representative sample of the loans purchased from Farmers First were fraudulent and subsequently informs Banner that it will not honor the guarantee. As a result, Banner’s investors in the repo programs associated with Farmers First lost millions of dollars. Gostkowski’s actions are

    A. inappropriate.
    B. appropriate because he collected the financial statements from Farmers First and did background checks on both the company and its principals before Banner engaged with the company.
    C. appropriate because he confirmed Farmers First was a USDA-approved lender and was told by legal counsel that the company’s loans were guaranteed by the government.
    D. appropriate because he conducted an on-site visit of Farmers First’s offices once he had concerns about the company.
    E. none of the above. 

    ANALYSIS
    This case relates to an investment professional’s responsibility to conduct due diligence on investments on behalf of clients and investors. CFA Institute Standard of Professional Conduct V(A): Diligence and Reasonable Basis requires CFA Institute members to exercise diligence, independence, and thoroughness in analyzing investments and to have a reasonable and adequate basis for investment recommendations and action. Banner and Gostkowski have a responsibility to thoroughly investigate Farmers First as a counterparty before allowing clients to invest in the associated repo program.
    The facts indicate that Gostkowski took a number of steps to conduct due diligence, including collecting financial statements, conducting background checks, confirming that the firm was USDA approved, checking with counsel on potential liability issues, researching the Farmers First auditor, and trying to investigate the underlying assets (loans) at the heart of the repo investment. But many of these steps were inadequate, raised red flags that were ignored, or happened only after Banner had committed client assets to a fraudulent investment. As a result, the facts are sufficient to indicate that Gostkowski and Banner failed to exercise appropriate due diligence with respect to the Farmers First repo investments. Choice A is the best answer.

    This case is based on a November 2018 Enforcement Action by the US SEC.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • VIDEO: ESG strategy for Hong Kong

    Natalie Yiu    Mary Leung, CFA, Pat-nei Woo, Stephen Wong
    07 Mar 2019
    1024
    0

    This recorded seminar qualifies for 1.0 CE credit under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 
     
    Following the release by FSDC of its ESG strategy proposal for Hong Kong, a panel hosted by FSDC, CFA Institute and HKSFA discusses its recommendations and the future of Hong Kong as an ESG investment centre. (Video: 1 hr 19 min.)
     
  • Ethics in Practice: Social Media Promotion

    28 Feb 2019
    36
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 61)
    Lloyd Juniper is a globally famous professional boxer living in Las Vegas, Nevada, with approximately 21 million Instagram followers, 7.8 million Twitter followers, and 13.4 million Facebook followers. Juniper promotes on his social media accounts an initial coin offering (ICO) from Sentara Technologies (Sentara) promoting its STAR cryptocurrency tokens on the Ethereum blockchain. The purpose of the ICO is to raise capital to enable Sentara to complete and operate what it termed the “world’s first Multi-Blockchain Debit Card and Smart and Insured Wallet,” a financial system that would, purportedly, allow holders of various hard-to-spend “cryptocurrencies” to easily convert their assets into legal tender, and spend these “cryptocurrencies” in “real time” using a Visa- or MasterCard-backed “Sentara Card.”

    Juniper posted on his Instagram and Facebook accounts a picture of himself holding a Sentara Card at a shoe store with the caption: “Spending bitcoins, Ethereum, and other types of cryptocurrency in Beverly Hills with my Titanium Sentara Card. Join Sentara’s ICO next month!” In addition, Juniper recorded a video at a department store in Los Angeles, which purported to show him using the so-called “Sentara Wallet” application on an iPhone and a “Sentara Card” to buy several items at the checkout counter. Sentara subsequently posted the video to YouTube under the headline “Lloyd Juniper Spending Bitcoin with Sentara Card & Sentara Wallet.” Although Sentara paid Juniper $100,000 for this promotion, Juniper did not disclose any information about the payment in his posts. Juniper’s actions are

    A. appropriate as a product endorsement typically made by well-known celebrities.
    B. appropriate because Juniper’s social media followers are savvy enough to understand that Juniper is being compensated for the posts.
    C. inappropriate unless Juniper discloses the payment.
    D. inappropriate if the ICO is unsuitable for Juniper’s social media followers.
    E. none of the above. 

    ANALYSIS
    This case relates to conflicts of interest and disclosure of referral fees. CFA Institute Standard VI(C): Disclosure of Conflicts – Referral Fees requires CFA Institute members to disclose any compensation, consideration, or benefit received from others for the recommendation of products and services. As a professional boxer, it is unlikely that Juniper is a CFA® charterholder subject to the CFA Institute Standards of Professional Conduct. Neither could Juniper arguably be seen as an investment professional (nor his social media followers as investment “clients”) subject to the general ethical principles or suitability requirements applicable to investment advisers.

    But although celebrities often capitalize on their fame by making product endorsements, the STAR tokens, as investment contracts, are regulated by the US SEC pursuant to the US Securities Act. Section 17(b) of the US Securities Act makes it unlawful for any person to “publish, give publicity to . . . (or) circulate any communication which, though not purporting to offer a security for sale, describes such security” in return for payment from an issuer, underwriter, or dealer, “without fully disclosing the receipt . . . of such (payment) and the amount thereof.” This provision of US securities law is applicable regardless of the sophistication of the audience for the communication and has the same effect as Standard VI(C) in that it requires disclosure of payments for touting the security. Therefore, Juniper’s actions are inappropriate and a violation of US securities laws because he failed to make the proper disclosure. (If Juniper was a charterholder, his actions would have violated Standard VI(C) as well). Answer C is the best choice.

    This case is based on a US SEC Enforcement Action on 29 November 2018.

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Overcharging Clients

    21 Feb 2019
    49
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 60)
    Olsen is president and CEO of RCS, a registered investment adviser. RCS offered clients an advisory fee between 0.4% and 1.5% of their assets under management based on fee breakpoints described in its fee schedule. The schedule reduced the advisory fee as a client’s assets under management increased. RCS’s fee schedule was incorporated by reference in client advisory agreements, distributed to clients upon request, and disclosed in RCS’s regulatory disclosure filings. RCS’s written policies and procedures manual stated that RCS was to conform its client fees and fee billing practices to those described in the regulatory filings in the advisory agreements provided to clients. In certain instances, however, RCS failed to apply the breakpoint discounts. As a result, RCS improperly calculated advisory fees and thereby overcharged certain clients. As president and CEO, Olsen

    A. met his ethical responsibilities if he delegated responsibility for billing and fees to competent personnel in RCS’s accounting department.
    B. met his ethical responsibilities if he made certain that appropriate policies and procedures were in place to ensure that RCS properly billed its clients.
    C. met his ethical responsibilities if the erroneous billing was the result of clerical error and inadvertent.
    D. failed to meet his ethical responsibilities.
    E. None of the above.
     
    ANALYSIS
    Although the harm to clients and the misconduct of the firm is clear, the facts and answer choices examine this case from the perspective of Olsen’s supervisory responsibility. CFA Institute Standard of Professional Conduct IV(C): Responsibilities of Supervisors requires members to make reasonable efforts to ensure that those subject to their supervision or authority comply with applicable law and ethical responsibilities. As president and CEO, Olsen has overall accountability for the conduct of the firm and is ultimately responsible for compliance with applicable legal requirements and fulfilling the firm’s ethical duties to clients. As the leader of RCS, he may delegate these responsibilities to competent and knowledgeable subordinates. Whether conduct constitutes reasonable supervision in compliance with Standard IV(C) is determined by the facts or circumstances of each particular case.
     
    Delegation of billing functions to competent personnel alone does not absolve Olsen of his supervisory responsibility. At a minimum, Olsen should have made reasonable efforts to prevent and detect violations by ensuring the establishment of effective compliance systems. At the same time, ignoring or not properly implementing compliance policies and procedures could result in a violation of the Standard because of the failure to supervise. The occurrence of inadvertent errors may not indicate improper structure or application of billing policies and procedures but could be a red flag indicating the existence of ineffective policies or sloppy, error-prone work that should be addressed through adequate supervision. The CFA Institute Ethical Decision-Making Framework calls on those seeking to engage in ethical conduct to identify the relevant facts to determine the appropriate course of action. In this case, although the firm’s actions harmed clients and resulted in liability for regulatory violations, the facts given are insufficient to allow a definitive determination of whether the overcharging of clients was a result of inadequate supervision by Olsen. Choice E is the best answer.
     
    This case is based on a US SEC Enforcement Action from November 2018.

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • WEBINAR - CEO’s Insights: Building a Financial Services start-up

    ARX Administrator    Radhika Gupta, Shreenivas Kunte CFA, CIPM
    18 Feb 2019
    1065
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    In this webinar, Ms Radhika Gupta – CEO of Edelweiss Asset Management, will discuss what it takes to starting your own financial services venture.
    Learning outcomes:

    1. Understand factors that contribute to building a successful start-up venture
    2. Appreciate insights and best practices on writing a start-up business plan
  • Ethics in Practice: Accessing Firm Resources after Retirement

    14 Feb 2019
    32
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 59)
    Mikalev recently retired from his position as the head of mergers and acquisitions at a large international bank. Two weeks into his retirement, he discovered that he still had access to his bank’s online business journal subscription, Bloomberg market data feeds, and online data room, which contains highly sensitive documentation about a client’s upcoming acquisition. Mikalev had been in the very early stage of working on the acquisition when he left the investment bank.
    Mikalev enjoys his continued access to the newspaper and Bloomberg and, if he ever considered going back to work in the industry, the information helps him to stay abreast of market trends. Of course, remembering his firm’s annual compliance training, he does not communicate or trade on the information related to the imminent acquisition by his former client. Mikalev’s actions are

    A. appropriate as long as he does not trade on the material nonpublic information.
    B. inappropriate because he should not have access to material nonpublic information from his firm.
    C. inappropriate because he should not access any of the firm’s resources.
    D. appropriate, even if he trades on the material nonpublic information, because he is no longer bound by his firm’s standards and compliance policies. 

    ANALYSIS
    This case relates to duty to employer, confidentiality of client information, and potentially trading on material nonpublic information. Because Mikalev has retired from his position and no longer works for the firm, it would be improper for him to have access to confidential client information. CFA Standard III(E): Confidentiality requires that client information must be kept confidential and shared only under specific circumstances, which are not present in this case. Not trading on the information does not absolve Mikalev of violating the confidentiality standard.

    Trading on the client information would not only be a violation of the confidentiality standard but also Standard II(A): Material Nonpublic Information, which prohibits CFA Institute members from trading on material nonpublic information, such as the information related to the client’s planned acquisition. Such action is prohibited regardless of the fact that Mikalev no longer works for the firm.

    It is possible that the firm allows employees who have retired to have access to general firm resources, such as journal subscriptions and Bloomberg data that do not include confidential client or material nonpublic information, as “retirement benefit” in gratitude for their past service. But there is no indication from the facts of this case that Mikalev’s firm has given permission or is even aware that he is using firm resources. Without a clear indication of permission by the firm, Mikalev should not use any of the resources, make the firm aware that he mistakenly continues to have access, and proactively request that his access be removed. Answer C is the best choice.

    This case is based on facts submitted by an Ethics in Practice reader.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Political Contributions

    07 Feb 2019
    88
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 58)
    Myers is a founder of and partner at Redbrick, a $3 billion hedge fund focused on environmental, social, and governance investments. In support of upcoming state elections, he donated $2,000 to DeFrietas, one of the candidates. As a passionate climate advocate and an avid proponent of responsible investment, Myers supported DeFrietas’ backing of environmental policies to reduce air pollution and mitigate the effects of climate change. Myers also thought that his political contribution might be beneficial for Redbrick because DeFrietas was running for a position that had influence over which hedge funds received investments from the state’s pension plans. Myers informed all Redbrick limited partners (LPs) about the contribution and clarified that he had used personal rather than company funds for the political contribution. Myers’ actions are

    A. appropriate because he provided full disclosure about his political contribution to his clients.
    B. appropriate because he used personal funds and the amount of his donation is insignificant relative to the size of the fund.
    C. appropriate because his donation supports a candidate whose environmental policies align with his beliefs.
    D. inappropriate because making donations to try to win investments from the state pension fund violates the CFA Institute Code of Ethics and Standards of Professional Conduct.

    ANALYSIS 
    This case relates to CFA Institute Standard I(B): Independence and Objectivity, which states that CFA Institute members must not offer any gift, benefit, compensation, or consideration that reasonably could be expected to compromise another’s independence and objectivity. Managers may try to gain lucrative allocations from government-sponsored pension funds by making requested donations to the political campaigns of individuals directly responsible for the manager hiring decisions. This activity would be prohibited by Standard I(B). In this case, Myers seems to have both proper and improper motivations for making a political contribution to DeFrietas. On the one hand, Myers supports DeFrietas’ positions on protecting the environment and wants to further those goals. The standard is not meant to prevent participation in the political process through financial or other support for candidates by investment professionals. On the other hand, Myers recognizes that financial support of DeFrietas could benefit Redbrick by currying favor with someone who may be in a position to determine whether to invest in Redbrick’s fund.
    The source of the funds — personal or from Redbrick — is irrelevant if the donation was meant to influence DeFrietas. Similarly, disclosure to clients does not address or mitigate the issue of the contribution’s effect on the independence and objectivity of the hiring decision maker. The question is whether the donation is reasonably designed to improperly affect DeFrietas’ independence and objectivity and to benefit Myers or Redbrick directly. Many factors would go into this determination, including the size of the donation, Myer’s intent in making the donation, and how influential DeFrietas’ position would be in making the hiring decision. As Myers’ actions could be perceived as inappropriate, the safest course of action would be to avoid any potential conflict by not donating to the DeFrietas campaign and by seeking to support environmental protection policies in some other way.
    In the United States, “pay-to-play” scandals and similar events have led to numerous laws, rules, and regulations at the state and federal level governing political contributions. Under US law, it is unlawful for investment advisers, including hedge funds and private equity firms, to provide compensatory advisory services to a government client for a period of time following a political contribution by the firm or one of its “covered associates” to political candidates or officials in a position to influence the selection of advisers to manage public pension funds or other government client assets. Small contributions are exempted by the rule. CFA Institute members should take care to ensure that their conduct in making political donations complies with the law so as not to risk a violation of CFA Institute Standard I(A): Knowledge of the Law.

    This case was submitted by Anna Sembos, CFA, who serves as volunteer with Compliance Connection, an extension of the CFA Institute Global Monitoring Program.
     


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • WEBINAR: Machine Learning Insights - Digital MSME Lending, a disruptive game changer

    ARX Administrator    Shalabh Singhal CFA, Shreenivas Kunte CFA, CIPM
    01 Feb 2019
    836
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 


    The webinar will address the following learning outcomes. Understanding:

    1.  Size of the Digital MSME Lending opportunity in India and its impact on overall economy
    2.   Key enablers for the Digital MSME Lending ecosystem
    3.   Key Machine Learning applications (credit decisioning and beyond) in Digital MSME Lending
    4.   Popular Machine Learning models in Digital MSME Lending
    5.   Key risks and control measures in ML powered Digital MSME Lending
     
  • WEBINAR: Practitioners’ Insights - Fast Electronic Markets

    ARX Administrator    Larry Harris, CFA, Shreenivas Kunte CFA, CIPM
    01 Feb 2019
    98
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    The webinar will address the following learning outcomes:
    • Understand how the efficiencies of electronic trading led to its widespread adoption.
    • Recognize how buy- and sell-side traders use electronic strategies to their advantage.
    Appreciate how electronic trading improves capital formation and price efficiency and thus public welfare.
     
    This is the archived version of a live webinar that took place on 13th December 2018.
     
  • Ethics in Practice: Presenting Investment Performance

    31 Jan 2019
    68
    0

    Ethics in Practice: Exchange Listing
     
    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 57)
    Jergens is the portfolio manager for the Volare Investment Management (VIM) fund, a registered collective investment scheme (CIS) organized under the laws of South Africa. VIM’s 2018 regulatory disclosure and marketing material for the fund, as produced by Jergens, presents annual investment performance data for the 2010-16 period that is accurate and calculated correctly. The performance history is that of a composite of separate accounts that followed the strategy used by the VIM fund prior to the assets being moved over to the CIS environment in 2017. In presenting the fund’s performance history, Jergens’ actions are

    A. appropriate because the investment performance is accurate.
    B. inappropriate because the investment performance is misleading.
    C. appropriate as long as the performance calculations are net of fees.
    D. inappropriate if Jergens was not the manager of the composite of segregated accounts from 2010.

    ANALYSIS
    This case relates to CFA Institute Standard III(D): Performance Presentation, which states that CFA Institute members must make a reasonable effort to ensure that investment performance information is fair, accurate, and complete. Although the performance information presented by Jergens is calculated correctly and includes technically accurate data, Jergens’ failure to indicate clearly that the performance data applied to a period prior to registration of the VIM fund as a CIS had the potential to mislead investors into believing that the CIS fund had a long track record. To meet the “fair, accurate, and complete” requirement of the standard, Jergens should disclose that the 2010–16 performance history was that of a prior but similar entity and that the VIM fund, as a CIS, has been in existence only since 2017. Performance can be presented either net or gross of fees, as long as there is sufficient disclosure to inform investors about how the performance is calculated and what affect fees may have on the return figures. It is not inappropriate to present performance of a fund, account, or composite of accounts when the managers have changed, as long as the change of investment personnel during the period being presented is disclosed. Choice B is the best answer.

    This case is based on an April 2018 Enforcement Action by the South African Financial Sector Conduct Authority.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Exchange Listing

    17 Jan 2019
    62
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 56)
    Ackerman is a securities contractor working to assist Superior Western Energy (SWE) list its shares on the Australian Security Exchange (ASX). SWE filed a prospectus for an offer of up to five million shares at $2 each to raise $10 million. The ASX listing rule applicable at the time required that entities seeking admission to the ASX must meet a “minimum spread requirement” of at least 300 shareholders with a minimum value holding to qualify for listing on the exchange. In their listing application, representatives of SWE informed ASX that the minimum spread requirement of 300 shareholders had been met. These disclosures included as shareholders 31 people or companies arranged by Ackerman. But none of the supposed shareholders were genuine buyers of SWE securities; Ackerman had provided false names and addresses for the investors. The SWE share offer raised more than $3.5 million, with more than 1.75 million shares being issued. SWE was admitted to the official list of the ASX, and its shares were quoted on that exchange. Over time, the price of SWE shares steadily increased, the company attracted hundreds of investors and shareholders, and early investors achieved an excellent investment return. Ackerman’s actions were

    A. unacceptable.
    B. acceptable because SWE proved to be a strong company with excellent performance.
    C. acceptable because no investors were harmed by a technical violation of ASX rules.
    D. acceptable if SWE would have met the minimum spread requirement without the 31 fictitious investors claimed by Ackerman. 

    ANALYSIS
    This case relates to CFA Institute Standard of Professional Conduct II(B): Market Manipulation, which prohibits CFA Institute members from engaging in practices that artificially inflate trading volume to mislead market participants. In this case, Ackerman engaged in information-based manipulation by falsely inflating the number of initial investors in the SWE securities. According to the Australian Securities and Investments Commission, the purpose of the minimum requirements for securities to be listed on the ASX is to demonstrate that there is sufficient investor interest in the company to justify its listing. This operates to ensure some level of liquidity at the time the company is initially listed and keeps poorer quality applicants that are not able to attract sufficient investor interest to meet the minimum spread requirement from being admitted to the ASX official list.
    Falsifying the number of initial investors, therefore, goes beyond a technical violation of ASX rules and has substantive consequences. The fact that SWE ultimately proved to be a bona fide and solid investment does not mitigate Ackerman’s conduct. Even if SWE met the minimum spread requirement without the 31 invented investors, Ackerman’s misrepresentations still falsely pumped up the initial interest in SWE securities to circumvent regulatory requirements and drive interest in the investment. Choice A is the best answer.

    This case is based on a 22 October 2018 Enforceable Undertaking by the Australian Securities and Investments Commission.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Billing Inaccuracies

    11 Jan 2019
    41
    0

    Description (Max 10000 characters)*
    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 55)
    O’Reilly is chief financial officer of Global Strategic Partners (GSP), a global investment adviser that merged with Holland Advisers, a smaller regional investment adviser. As a result of the merger, GSP becomes the adviser of record for several thousand Holland clients. For a period following the merger, GSP maintains Holland’s legacy billing system for original Holland clients until those clients can be converted to GSP’s billing system and platform. When the Holland billing system is converted, O’Reilly reviews the client billing information to ensure that it is correctly copied into the GSP billing system.
    Unbeknownst to O’Reilly, Holland’s billing system has a number of billing inaccuracies. For instance, Holland’s billing system inadvertently causes client advisory fees to default to the highest available account fee when client accounts in one advisory program are transferred between branches. Also, Holland’s billing system charges outside manager fees on assets that are held in money market accounts that do not use an outside manager. Finally, Holland’s billing system does not reimburse advance-billed fees when clients terminate their accounts. Some of these fee billing errors resulted from coding or other systems errors, whereas others were caused by administrative errors, including the failure of Holland personnel to immediately input negotiated lower fee rates into the billing system. As chief financial officer of GSP, O’Reilly

    A. is not responsible for inadvertent billing system errors by Holland before the merger.
    B. fulfills his responsibilities by reviewing client billing information for Holland clients to ensure that it is correctly copied into the system.
    C.  fails to meet his ethical responsibilities to his firm’s advisory clients.
    D. acts appropriately as long as he remedies Holland’s billing errors once the client accounts are converted to GSP’s billing system and platform. 

    ANALYSIS
    This case relates to CFA Institute Standard III(A): Loyalty, Prudence, and Care, which states that CFA Institute members must act with reasonable care and prudent judgment when acting for the benefit of their clients. According to the facts, advisory clients of Holland Advisers are overcharged on their fees as a result of errors in the Holland billing system. After the merger, these investors become clients of GSP, and “for a period following the merger,” GSP uses Holland’s billing system. Although the errors may have been inadvertent and created by personnel of another entity at a time that predated O’Reilly’s involvement, they carry over and become O’Reilly’s responsibility once GSP uses the inaccurate billing system, even temporarily.
    As chief financial officer, O’Reilly becomes responsible for the accuracy of the rates charged clients and the billing system used to collect client fees. Fixing the issues when the billing is converted to the GSP system does not account for the initial period of overbilling by GSP when using the Holland system. It is not enough for O’Reilly to ensure the accuracy of the information being transferred. He also should have confirmed that the fee information was accurate and consistent with the clients’ advisory agreements. Otherwise, the billing anomalies have the potential to cause the incorrect fee rates to transfer into GSP’s billing system. Choice C is the best answer.

    This case is based on a 2017 Enforcement Action by the US SEC.
     


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Trade Allocation

    04 Jan 2019
    46
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 54)
    Perkins is the co-owner and chief investment officer of Global Trading Financial (GTF). Perkins’ wife is GTF’s compliance officer. GTF has several dozen retail clients and total assets under management of $70 million. All client assets are managed on a discretionary basis. Perkins frequently makes trades for his clients using an omnibus trading account through a broker/dealer, which allows Perkins to buy and sell securities in a block trade on behalf of multiple clients simultaneously. Perkins regularly allocates the securities purchases to individual client accounts after the market closes. Over one six-month period, Perkins allocates 75% of the profitable trades to nine accounts owned or controlled by Perkins and his wife. At the same time, 82% of the unprofitable trades are allocated to the account of the three largest GTF clients. Perkins’ actions are

    A. acceptable as long as he discloses the trade allocation practices to his clients.
    B. acceptable as long as he accurately represents whether or not he trades in the same securities as his client.
    C. acceptable as long as he reverses his trade allocation practices to favor the larger clients so that they are not harmed over the long term.
    D. unacceptable.

    ANALYSIS
    This case relates to CFA Institute Standard VI(B): Priority of Transactions, which states that investment transactions for clients have priority over personal transactions. By trading in the firm’s omnibus account and then delaying allocation of trades to a specific account until he has an opportunity to observe the security’s intraday performance, Perkins is able to cherry-pick the winning trades for accounts in which he has a beneficial interest. This is a violation of Standard VI(B). He allocates the losing trades to client accounts that are large enough to absorb incremental, although steady, trading losses without arousing client suspicion that the losses are due to fraud.
    Disclosure is not a cure for this unethical, fraudulent behavior. It is also irrelevant to the priority of transactions issue what Perkins tells his clients about whether he trades in the same securities for his personal accounts as he does for his client accounts. (Although if he claimed not to personally trade in securities being considered for purchase by clients, and did so anyway, that would be further fraud.) Finally, Perkins cannot temporarily favor his personal interests over his clients’ interests with the intent of making it up to the clients later. Ethical conduct is not subject to some ledger-keeping exercise. CFA Institute members must, and really all investment professionals should, comply with ethical principles at all times. Choice D is the best answer.
    This case is based on a September 2018 Enforcement Action by the US SEC.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Allocating Expenses

    28 Dec 2018
    37
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 53)
    Smith is a portfolio manager at an alternative asset management firm, AltInvest LLC. At the direction of her boss, she makes a one-time allocation of the expenses incurred by the Private Credit Opportunities fund to the Private Credit Special Situations fund. Her boss wants to temporarily boost the end-of-year results of the Private Credit Opportunities fund, which has been underperforming. Her boss explains that the Private Credit Special Situations fund closed recently and just entered its long investment period, thus investors in the fund would not yet expect it to deliver good results. In contrast, the investment period of the Private Credit Opportunities fund ended years ago, and its harvesting period is soon coming to an end. Boosting the performance of the Private Credit Opportunities fund also should help attract investors to the Private Credit Opportunities II fund. The consolidated performance results of AltInvest are not affected by the reallocation of expenses between these two funds. Smith’s actions are
    1. inappropriate.
    2. appropriate because the consolidated performance results of AltInvest are not affected by the reallocation of expenses.
    3. appropriate because the chosen way of reporting is only temporary.
    4. appropriate because Smith followed the directions of her boss.
    ANALYSIS
    This case relates to CFA Institute Standard III(D): Performance Presentation, which states that CFA Institute members must make reasonable efforts to ensure that the investment performance results communicated to their clients are fair, accurate, and complete. Smith’s actions are inappropriate because reallocation of expenses between the two funds renders a misrepresentation and is not a fair, accurate, and complete presentation of the two funds’ performance, even though the consolidated results of AltInvest are not affected. Developing and maintaining clear and accurate communication with clients regarding the performance of their investments is critical because it allows clients to make well-informed decisions about their investment portfolios, including about whether to withdraw their money from underperforming funds or whether to invest in follow-on funds. Any misrepresentation of performance, however temporary, affects investors’ assessment of their investments and subsequently their investment decisions. In this case, Smith made the allocation of expenses at the direction of her boss, who had determined that the temporary boost of the Private Credit Opportunities fund’s end-of-year results would benefit AltInvest. But the interests of an investment professional’s employer are secondary to protecting the interests of clients. In asking Smith to make the reallocation of expenses between the two funds, her employer is acting contrary to Smith’s clients’ interests. Following the direction of a supervisor does not excuse unethical behavior or actions contrary to a client’s best interests. Choice A is the best answer

    This case was written by Anna Sembos, CFA, who serves as volunteer with Compliance Connection, an extension of the CFA Institute Global Monitoring Program.
     
    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Elderly Investors

    20 Dec 2018
    67
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 52)
    Kinner is an investment adviser with a number of elderly high-net-worth clients. One of her clients, Abbott, an 87-year-old globally well-known photographer, has been Kinner’s client for more than 30 years. She visits Kinner’s offices regularly to discuss her investment portfolio. Over the past several visits, Kinner has noticed that Abbott has increasing difficulty communicating and seems to be confused about concepts and ideas that she formerly was familiar with and able to understand. Abbott also appears significantly physically diminished. Lately, she has been accompanied by her grandson who describes himself as Abbott’s caregiver.
    During her most recent visit, Abbott asks Kinner to move a portion of her assets into some speculative investments and to withdraw a significant amount of funds so that she can invest in a bakery that her grandson is opening. Abbott assures Kinner that these are her wishes, stating, “I have talked about these changes with my grandson, and we are sure these are good investments.” Kinner is alarmed by Abbott’s new investment directives, believes Abbott’s physical and mental health may be declining, and suspects Abbott has been improperly influenced by her grandson, who is taking advantage of Abbott’s wealth. Kinner does not make the changes to Abbott’s portfolio that Abbott requested. Instead, Kinner reports her concerns to a government agency charged with administering assistance to the elderly and infirm, as permitted by applicable law. Kinner’s actions are

    A. inappropriate because Kinner should have contacted a close family member or trusted professional, such as Abbott’s attorney or accountant, about her concerns regarding Abbott’s apparent decline.
    B. appropriate because Kinner is working to protect Abbott’s interests and is following applicable law.
    C. inappropriate because Kinner is violating her duty of confidentiality under the CFA Institute Standards of Professional Conduct by discussing Abbott’s investments with the government agency.
    D. appropriate if Kinner speaks separately with Abbott’s grandson in his role as Abbott’s caregiver to advise against changing the investment directives. 

    ANALYSIS
    This case involves CFA Institute Standard III(E): Confidentiality, which requires CFA Institute members to keep information about clients confidential unless the information involves illegal activities, the client permits disclosure, or disclosure is required by law. This requirement can become problematic if an investment professional suspects that a client’s mental faculties are failing and thus believes it is necessary to consult with outside parties. A best practice for investment advisers is to establish a secondary contact at the beginning of the client arrangement. The client provides permission for the investment professional to contact the designated person should concerns arise about the client’s ability to make informed financial decisions.
    In the absence of such an arrangement, investment professionals may make limited disclosures pertaining to the existence of a client account and concerns about the vulnerability of the client as directed by applicable law. Regulatory or government agencies often provide resources for intervening when such concerns arise. These entities have the authority to properly investigate the situation of the investor. CFA Institute members who are following applicable law regarding permitted disclosures are not in conflict with their obligations under Standard III(E). But speaking with other third parties, such as Abbott’s attorney, accountant, or grandson, about confidential information in Abbott’s account would violate Standard III(E). Choice B is the best answer.
    This case is based on new guidance on providing services to vulnerable clients under CFA Institute Standard of Professional Conduct III(E): Confidentiality, which was recently released by CFA Institute.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • FinTech 2018: The Asia Pacific Edition

    18 Dec 2018
    2430
    371

    This report qualifies for 2.5 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits

    How will FinTech affect the future of financial institutions, careers of financial professionals and other stakeholders? CFA Institute's report covers the business and technology aspects of FinTech in Asia Pacific.
     
  • WEBINAR: Unmasking the myths of the palm oil industry 

    ARX Administrator    Eugenie Mathieu, Alan Lok, CFA, Guruprasad Jambunathan, Clara Melot, Rocky Tung
    16 Dec 2018
    2813
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    In this webinar, panelists with different POVs within the industry cover the following topics and more:
    • Outlook of the palm oil industry
    • Investors’ perception and concerns in the industry
    • Key ESG risks of the industry and solutions to the risks
    • Examples of initiatives undertaken by different stakeholders of the industry
    • Regulatory actions undertaken by various governments
     
  • Ethics in Practice: Disclosures on Twitter

    14 Dec 2018
    486
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 51)
    Allen Brodeur is CEO and Chairman of the board of Questla, a multibillion dollar company that makes electric cars. Brodeur and Questla disclose to the public and regulators that the company will use Brodeur’s personal Twitter account to disseminate information to Questla investors and the investing public. In the midst of media reports that the company was having difficulty producing and delivering its cars to buyers, Brodeur posts a tweet stating that the company is “considering taking Questla private at $420 a share. Funding is secure.”
    Some time prior to this tweet, Brodeur had met with a large sovereign wealth fund that expressed general interest in investing in the company and taking the company private. Brodeur and the sovereign wealth fund had not come to any specific agreement or determined a share purchase price. Brodeur was also in discussions with investment banks, but had not yet retained any advisers to assist with going-private transaction. After the tweet, Questla’s stock price increased more than 6% on significantly increased volume and closed at $380 per share, 10% higher than the previous day. When asked about the specific stock price in the tweet, Brodeur admitted that it was not discussed with the sovereign wealth fund but that he chose the price of $420 because of the number’s significance in the marijuana culture and thought his girlfriend “would find it funny.” Brodeur’s actions are

    A. appropriate because disseminating material information to investors through social media is a valid method for publicizing information.
    B. inappropriate because not all investors use social media, and thus, Brodeur is putting certain investors at a disadvantage and selectively disclosing the information.
    C. inappropriate because the tweet was a misrepresentation of the facts.
    D. appropriate because his tweet only said that he was “considering” taking the company private and thus the tweet contained only speculative, nonmaterial information.

    ANALYSIS
    This case relates to CFA Institute Standard I(C): Misrepresentation, which states that CFA Institute members must not knowingly make any misrepresentation relating to professional or investment activities. Brodeur’s tweet was premised on a series of baseless assumptions and was contrary to facts that he knew. Among other things, he (1) had not agreed on any terms for a going-private transaction with the sovereign wealth fund, (2) had never discussed a going-private transaction at a share price of $420, (3) set the price as an inside joke with his girlfriend, and (4) had not formally retained any legal or financial advisers to assist with a going-private transaction. Unlike market participants reading his tweet, Brodeur knew that his ostensibly “secured” funding was based on a general conversation regarding a potential investment of an unspecified amount in the context of an undefined transaction structure. Because there were many uncertainties that would have needed to be resolved before any going-private transaction could be possible, Brodeur knew or should have known that his statements were false and misleading.
    But the tweet can be considered “material” information and not speculative given that the source of the tweet was the company’s CEO and Chairman of the board, the subject matter of the tweet was dramatic and elemental, and investors would want to know the information prior to making an investment decision. Disseminating information to investors using social media may be appropriate and ethical under certain conditions. Distribution channels to make information public do not need to guarantee to reach all investors, but they must be designed to effectively make the information public. As long as information reaches all clients or is open to the investing public, the use of social media platforms would be comparable with other traditional forms of communication, such as press releases or email communication. Because the information in this case was misleading, Brodeur’s use of social medial was not appropriate. Choice C is the best answer
    This case is based on a 29 September 2018 enforcement action by the US SEC.
     


     Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • WEBINAR: Preview 2019 CFA Program Curriculum: Big Data, AI and more

    ARX Administrator    Barbara S. Petitt, CFA, Shreenivas Kunte, CFA, CIPM
    12 Dec 2018
    266
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    Learning outcomes:
    • Understand key changes to the 2019 CFA Program curriculum
    • Preview Big Data and Machine Learning concepts in the new curriculum
    • Understand how the CFA Program curriculum is developed
    • Understand the regional and local relevance of the CFA Program curriculum
  • WEBINAR: Practitioners' Insights: Asset Allocation

    ARX Administrator    Peng Chen, CFA, Shreenivas Kunte, CFA, CIPM
    12 Dec 2018
    962
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

     
  • WEBINAR: Practitioners' Insights: Airlines Sector in India

    ARX Administrator    Subrata Ray, CFA, Shreenivas Kunte, CFA, CIPM
    12 Dec 2018
    119
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    In this webinar, Subrata Ray, CFA, Senior Group Vice President, ICRA Limitedwill discuss the opportunities and challenges in India's airlines sector. The webinar will address the following learning outcomes:
    • Understanding the development of the airline industry in India and key challenges.
    • Assessing key operating and financial parameters while analysing the prospects of the airline industry.
    • Understanding the financial and operating factors to watch while assessing the credit risks in the airline industry.
  • WEBINAR: Investing in India's Growing Unlisted Space

    ARX Administrator    Vinay Bagri, CFA, Shreenivas Kunte, CFA, CIPM
    12 Dec 2018
    46
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    In this webinar, the following topics will be addressed:
    • Overview of the industry: structure, brief history, players
    • How to get started and sources of information (Investor/Market Maker)
    • Identifying and investing in an opportunity
    • Potential risks
    • Experiences over the years
    • Future outlook
    • Tax implications and recent regulatory developments
     
     
  • WEBINAR: Lessons from the Third Wave of Investing: Machine Learning and Alternative Data

    ARX Administrator    Michael Weinberg, CFA, Shreenivas Kunte, CFA, CIPM
    12 Dec 2018
    1959
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    In this webinar, we will cover the following:
    • How can the confluence of five factors assist with better investing outcomes?
    • What traits are typical of the best and worst third-wave managers from an investment due- diligence perspective?
    • How does one differentiate between third-wave managers, and second-wave managers--traditional computational finance managers?
    • What are the skill sets and the learning required to become a third- wave manager?

     
  • WEBINAR: Fintech in India - Opportunities and Challenges

    10 Dec 2018
    160
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

     
  • WEBINAR: The Elephant and the Dragon - A Look at the Changing Dynamics Between China and India

    10 Dec 2018
    2027
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 
  • WEBINAR: ​Advanced accounting for researching Equities

    ARX Administrator    Nimisha Pandit CFA, Shreenivas Kunte CFA, CIPM
    10 Dec 2018
    136
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    This webinar discusses about the experience on advanced accounting concepts used for researching listed companies
  • WEBINAR: Insights on Smart Beta and Factor Investing

    ARX Administrator    Jason Hsu, PhD, Shreenivas Kunte, CFA, CIPM
    10 Dec 2018
    101
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    This webinar gives foundational understanding on smart betas and factor investing from a pioneer in this field
  • WEBINAR: Lessons from the CIO’s World

    ARX Administrator    Aradhana Gupta Kejriwal, CFA, Shreenivas Kunte, CFA, CIPM
    10 Dec 2018
    98
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.  

    This webinar provides insights on the CIO’s decision-making process in a variety of investment areas
  • WEBINAR: Corporate Governance Regulation in Asia: New Risks and Opportunities for Investors

    ARX Administrator    Jamie Allen, Shreenivas Kunte CFA, CIPM
    10 Dec 2018
    69
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    This webinar highlighted two upcoming ACGA reports, one on China, and the second, a “CG Watch,” the association’s survey of corporate governance macro-quality in Asia 
  • WEBINAR: Practitioners’ Insight: Information Technology Sector

    ARX Administrator    Sudheer Guntupalli, Shreenivas Kunte, CFA, CIPM
    10 Dec 2018
    62
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    This webinar shows insights on how different drivers of the IT sector can be modeled. Also highlighting the basic accounting and pilferage checks that can be carried out by an analyst to identify potential red flags within reported financials of a company.
  • WEBINAR: The Discounted Cash Flow Method and the Hubble Telescope

    ARX Administrator    Rajeev Thakkar CFA, Shreenivas Kunte CFA, CIPM
    10 Dec 2018
    101
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    This webinar highlights the practical aspects of equity investing and valuing equity shares
  • WEBINAR: ESG Investing Insights: Social Business is Good Business

    ARX Administrator    Aarti Wig, Shreenivas Kunte, CFA, CIPM
    10 Dec 2018
    54
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 


    This webinar creates case that investors should deliberately invest in social businesses.  
  • WEBINAR: Practitioners' insights: Analysing the cement sector

    ARX Administrator    Amit Khurana, CFA, Shreenivas Kunte, CFA, CIPM
    10 Dec 2018
    104
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    This webinar shows the key factors that should be considered while valuing Indian cement companies or assessing the competitive advantages of individual firms. Discussion on the importance of the retail distribution network in driving market share and earnings
  • WEBINAR: Frameworks to identify Superior Management

    ARX Administrator    Alroy Lobo, CFA, Shreenivas Kunte, CFA, CIPM
    10 Dec 2018
    59
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    This webinar shows practical insights and a conceptual framework for identifying superior management.
  • Ethics in Practice: Marketing Investment Services

    06 Dec 2018
    72
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 50)
    Mallouk is president and majority owner of Creative Planning, Inc. (CPI), a US-based registered investment adviser with approximately $36.2 billion in assets under management. To advertise his business, Mallouk purchases several dozen radio advertisements in the local market. CPI’s policies and procedures require that the chief compliance officer or president review and approve any marketing materials or advertising concerning the firm or its services before publication or distribution. All of the radio spots are produced by two local radio hosts who have their own show that airs every weekday morning. Mallouk provides the radio station with copy points for the advertisements and approves the 60-second prerecorded advertisement that the pair record. After a few months, one of the radio hosts becomes a client of CPI. During his live radio program, in conjunction with the prerecorded ads, the host regularly mentions his client relationship with CPI, praises his CPI wealth manager by name, and details his satisfaction with the advisory services he received from CPI. Mallouk’s actions are
    1. appropriate as long as the content of the advertisements is truthful and accurate.
    2. appropriate as long as Mallouk does not provide any benefit to the radio host to highlight his positive experience with CPI.
    3. appropriate because Mallouk cannot control or preapprove what the radio host says during his program.
    4. inappropriate.
    ANALYSIS
    This case relates to CFA Institute Standard I(A): Knowledge of the Law, which requires CFA Institute members to abide by applicable law. The response to this case turns on the regulations governing CPI’s advertising practices. The facts presented do not describe the governing regulations, but the CFA Institute Ethical Decision-Making Framework specifies that investment professionals identify relevant facts when facing an ethical dilemma. If important facts are not known, investment professionals should seek out all information relevant to determining the appropriate course of action. Applicable law is always a relevant and important fact. In this case, the law and regulation applicable to CPI as a US-based adviser stipulates that it is a fraudulent, deceptive, or manipulative act, practice, or course of business for any investment adviser to, directly or indirectly, publish, circulate, or distribute any advertisement that refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser. [Rule 206(4)-1(a)(1) under Section 206(4) of the Advisers Act]
    The radio host’s live commentary accompanying the prerecorded spots constitutes an advertisement for CPI that was a testimonial, which is prohibited by applicable law. Mallouk’s conduct, therefore, violates CFA Institute Standard I(A). Mallouk also violated his firm’s policies and procedures by not reviewing the content of the radio host’s commentary. Mallouk and CPI could have directed that the radio host refrain from making a testimonial or providing extraneous commentary to the preapproved ads. Mallouk also could have monitored the station broadcasts or reviewed transcripts of the live spots to ensure that the advertisement met legal requirements. Even if the comments contained truthful and accurate information and the radio host was making those comments of his own volition with no incentive, the type of advertising violated the law. Choice D is the best answer.
    This case is based on an 18 September 2018 enforcement action by the US SEC.
     

     Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
     
  • WEBINAR: Key lessons from Financial History for Today's Investors

    ARX Administrator    Russell Napier, ASIP, Shreenivas Kunte CFA, CIPM
    04 Dec 2018
    707
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    In this webinar, it discussed 21 most important lessons from financial history that allow human beings to profit at the expense of the machines
  • Ethics in Practice: Employment Disputes

    29 Nov 2018
    102
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 49)
    Clifford, a senior partner at an investment advisory firm, hires McDougal as a junior analyst on a temporary basis with the understanding that if her work performance is satisfactory after three months she will be hired full time. At the end of the three months, although McDougal’s research work is satisfactory, she has had a number of conflicts with several male employees at the firm. Clifford tells McDougal that because of firm restructuring, a full-time position is no longer available, and McDougal is not given a position after her temporary employment contract expires. McDougal files a complaint with securities regulators and CFA Institute alleging various securities violations against Clifford and the firm.
    After an investigation, the complaint was found to be meritless. As part of the investigation, Clifford was able to prove that McDougal had been hostile to firm employees, used inappropriate language, and made threats against Clifford when she was not hired on full time. Clifford also produced emails and messages that McDougal sent to firm clients that falsely claimed Clifford was going to lose his CFA® designation because of the investigation by regulators and CFA Institute. After McDougal’s complaint against Clifford and the firm was dismissed, the firm once again advertised a position for a full-time junior research analyst. Choose the best response from the following choices:

    A.Clifford violated the CFA Institute Standards of Professional Conduct.
    B. McDougal violated the CFA Institute Standards of Professional Conduct.
    C. Although Clifford’s actions may be inappropriate, he did not violate the CFA Institute Standards of Professional Conduct.
    D. Although McDougal’s actions may be inappropriate, she did not violate the CFA Institute Standards of Professional Conduct.

    ANALYSIS
    This case relates to CFA Institute Standard I(D): Misconduct, which states that CFA Institute members must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. In this case, McDougal’s conduct clearly violates this standard. Certainly, the combination of making false allegations to regulators against your employer, filing a meritless complaint with CFA Institute, using inappropriate language in the workplace, making misrepresentative and disparaging comments to firm clients, and threating your supervisor all can be considered professional conduct involving dishonesty, fraud, and deceit as well as conduct that reflects adversely on professional reputation, integrity, and confidence. Clifford’s conduct, however, falls into a gray area. Although he did not hire McDougal after promising to do so and uses the excuse of a seemingly fictitious corporate restructure when informing her about her termination, those actions may not rise to the level of “misconduct” contemplated by the standard. McDougal’s research work may have been adequate, but her not fitting in well with colleagues or the firm culture could very well be a valid reason not to offer her a full-time position. Although she may have had conflicts with some male colleagues, there is no indication that her failure to receive a full-time position was because of her gender. Finally, although Clifford’s claim that the junior research analyst position was eliminated may have been false, some may see using the excuse of a phantom work restructuring as a gracious way for Clifford and the firm to disentangle themselves from an unwanted employee. In any event, McDougal’s subsequent conduct seems to show that Clifford made the right call on any future employment. Because McDougal’s conduct clearly violates Standard I(D), choice B is the best answer.

    This case is based on a recent CFA Institute Professional Conduct Investigation.
     
    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • WEBINAR: Cooking Books

    ARX Administrator    Saurabh Mukherjea, CFA, Shreenivas Kunte CFA, CIPM
    27 Nov 2018
    126
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    This webinar provides rich insights on how accounting books in India can be managed to mislead
  • Ethics in Practice: Trading in Mutual Funds

    22 Nov 2018
    84
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 48)
    Cherrington is a registered representative with a US broker/dealer who has a number of individual clients, including his mother. Cherrington trades mutual fund shares for his mother’s account, which has a long-term investment horizon. All of these funds have similar long-term risk and return objectives. Cherrington split $731,265 in investment funds in his mother’s account among 42 different mutual funds in 11 fund families. For the majority of mutual fund purchases, he sold the funds within 92 to 274 days of purchasing them. Cherrington earned $24,747 in sales charges for these trades but discounted the fees 10% because it was his mother’s account. Cherrington’s actions are

    A. unacceptable because Cherrington treated clients unfairly by discounting the fees in his mother’s account.
    B. acceptable because mutual funds are safe long-term investments.
    C. unacceptable because the trades resulted in unsuitable investments.
    D. acceptable because Cherrington diversified his mother’s investments among funds with a strategy that matched her long-term strategy and outlook. 

    ANALYSIS
    This case relates to Standard III(C): Suitability, which requires CFA Institute members to determine that an investment is suitable for a client’s financial objectives, mandates, and constraints before taking any investment action. In this case, Cherrington is trading mutual fund shares in funds with a similar long-term risk and return objectives as his mother’s account, which would seem to make these investments suitable for his mother’s account. But although mutual funds are generally safe and conservative investments, the short-term nature of the trades conflicts with his mother’s long-term investment horizon. In addition, the new mutual funds’ objectives and risks were similar to the funds that were sold, such that the $24,747 in sales charges, even discounted by 10%, outweighed any marginal benefit from the new mutual funds. Finally, splitting his mother’s investment funds into 42 different mutual funds in 11 fund families generated higher sales charges because his mother was unable to take advantage of savings from breakpoints that likely were available for larger investments. For all of these reasons, Cherrington’s investments for his mother’s account were unsuitable. Clients can be charged different fees; they do not have to be equal for all accounts. Fee discounts can be made for many reasons, and Cherrington may have given other similar or even more generous discounts. A discounted fee does not necessarily mean that clients are being treated unfairly. Choice C is the best answer.

    This case is based on a 10 August 2018 administrative action by the US SEC.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • WEBINAR: Practitioner insights from India: The healthcare and pharmaceutical sectors

    ARX Administrator    Prashant Nair CFA, Shreenivas Kunte CFA, CIPM
    22 Nov 2018
    178
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    This webinar offers a historical and structural overview of India's healthcare and pharmaceutical sectors. It includes insights on sector assumptions and drivers, which analysts should consider when building their models.
  • ​WEBINAR: The world of derivatives and valuation control

    ARX Administrator    Karthik Ramamurthy, Shreenivas Kunte, CFA, CIPM
    22 Nov 2018
    196
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    This webinar provides a broad overview of the valuation control process, including practitioner insights into best practices and current challenges. (Video: 1 hr)
  • WEBINAR: Insider Trading: Compliance and Beyond

    ARX Administrator    Suresh Gupta, Shreenivas Kunte CFA, CIPM
    22 Nov 2018
    128
    0

    This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    This webinar provides insights on the topic of insider trading, the webinar included Insider trading overview: intent and evolution, Required standards of practice, Common pitfalls, Case studies
  • Ethics in Practice: Issuer-Paid Research

    18 Nov 2018
    97
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 47)
    Estevez is a senior research analyst with BIR, a boutique investment research firm that covers micro- and small-cap companies. These companies hire BIR to provide research coverage to promote their stock to investors who otherwise might not be aware of them. Because of BIR’s stellar reputation, its research services are in heavy demand by both investors and those companies seeking to get on investors’ radar. Estevez helps BIR select the companies that should receive coverage and also oversees a team of junior analysts who conduct the research. Some companies encourage Estevez to select their company for research by providing her a separate bonus if they are included in the BIR research universe. Estevez’s actions are

    A. unacceptable because her independence and objectivity in conducting the research are compromised if the research is solicited and paid for by the covered company.
    B. acceptable as long as Estevez does not use material nonpublic information from the company.
    C. unacceptable if Estevez’s compensation from BIR is tied to the specific findings of the report.
    D. acceptable as long as her company approves offered payments from covered companies. 

    ANALYSIS
    The facts of this case relate to CFA Institute Standard IV(B): Additional Compensation Arrangements, which requires members to obtain written consent from their employer when they accept any gift, benefit, or compensation that might reasonably be expected to create a conflict of interest with their employer. In this case, Estevez receives a benefit from companies that are selected by BIR to receive research coverage. Because Estevez is involved in the process of choosing the companies that BIR agrees to research, that presents a conflict of interest because she might favor those companies that pay her the bonus.
    Issuer-paid research itself is not automatically unethical and does not automatically compromise the analyst’s independence and objectivity. But this area is fraught with conflicts, so important safeguards must be in place. BIR must adopt strict procedures protecting the inviolability of the analyst’s opinion from influence by the company. Such safeguards must also include full disclosure of any conflicts of interests on the part of the analyst conducting the research, full disclosure of any compensation arrangements, including the source of the payment for the research, and policies that disconnect the findings of the research from the level or nature of the payment. In this case, Estevez would have to disclose to her company that she is receiving the benefit from the issuer and BIR would have to disclose to the users of the report that the company paid Estevez the bonus and is paying for the research. The research could be considered independent and objective if Estevez did not use material nonpublic information from the company and if BIR’s compensation for the research from the company was not tied to the specifics of the report. But even if that was the case, it would not alleviate the issue of Estevez accepting bonuses from the covered companies without informing her employer. Choice D is the best answer, although it is incomplete because full disclosure is needed as well.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Client Promotion of Services

    08 Nov 2018
    82
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 46)
    King is a successful investment adviser with a number of high-net-worth clients who are very happy with him as their adviser. Many of King’s clients recommend his advisory services so that their friends and family can achieve the same positive results. King encourages these recommendations as a way to build his business. Each year, King holds an elaborate party for those clients who have referred new clients to his advisory firm to thank them for these referrals. At the party, King distributes nominal gift cards to attendees. In some instances, King offers discounts on advisory fees to clients who have provided him with referrals that prove to be particularly lucrative. Many of the clients attending these celebrations have been referred to King by other clients and they have, in turn, continued the cycle of recommending King to a wider circle of friends and family.
    King’s actions are

    A. acceptable as a proper method for client development.
    B. acceptable as a reward for client loyalty.
    C. acceptable as long as he treats all clients fairly.
    D. unacceptable.

    ANALYSIS
    This case relates to CFA Institute Standard VI(C): Referral Fees, which states that CFA Institute members must disclose any compensation, consideration, or benefit paid to others for the recommendation of services. In this case, King provides an elaborate party; distributes gift cards; and, in some cases, offers discounted advisory fees to only those clients who refer potential clients to him. These benefits must be disclosed. The facts of the case do not state whether King discloses the benefits that he gives for referrals to the potential incoming clients. The fact that some of the clients later become aware that he pays for referrals when they themselves are paid such fees is insufficient disclosure. If King wanted to hold a party or give gift cards to all his clients to reward their loyalty, whether or not they provided referrals, that would be acceptable. Arguably, King treats his clients fairly because he is offering the opportunity to receive these benefits and fee discounts to all his clients, so long as they make referrals to his business. Whether the clients access these benefits by making referrals is up to them. But regardless of whether King is treating all clients fairly, by not disclosing the benefits and compensation he awards for referrals, he has violated Standard VI(C). Choice D is the best answer.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Trading Illiquid Securities. 

    04 Nov 2018
    100
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 45)
    Zhang Zhi Ruo is an investment advisor offering clients fixed-income investment advice through numerous separately managed accounts and two pooled investment vehicles. She charges clients an advisory fee for assets under management (AUM) and does not charge clients based on trading activity. Zhang generally invests her fixed-income portfolios in nonrated, tax-exempt, and thinly traded municipal bonds that are issued to finance the construction of senior living facilities, schools, and prisons. Zhang often holds a controlling institutional position in the bonds held across client accounts. Zhang frequently arranges for authorized cross-trading in these securities to facilitate portfolio management and provide liquidity for terminating clients. By effecting cross trades among clients, rather than trading in the secondary market, Zhang provides selling clients with liquidity in an otherwise illiquid market while maintaining her controlling position in the securities.
    At the end of each month, Zhang prices the holdings in each client’s portfolio by obtaining bid-side evaluation quotes (bid price) from the various broker–dealers who underwrote each of the bonds. Frequently, Zhang challenges the prices quoted by the broker–dealers as too low and, in certain instances, the broker–dealers revise their quotes to Zhang’s proposed alternative price. When arranging cross trades, Zhang selects broker–dealers who are willing to execute cross trades at favorable, predetermined, spreads that are narrower than the average bid/ask spread of trades in the same or similar securities executed in the secondary market. The trades are executed at the bid price obtained from month-end valuation purposes.
    Zhang’s actions are

    A. inappropriate.
    B. appropriate because Zhang charges an advisory fee for AUM and therefore does not benefit from the cross trades.
    C. appropriate because Zhang is valuing thinly traded securities in her clients’ portfolios using price quotes from the underwriting broker–dealers who are familiar with the securities.
    D. appropriate because Zhang seeks best execution by using broker–dealers who are willing to execute the cross trades at favorable bid/ask spreads that are narrower than spreads in the secondary market. 

    ANALYSIS
    This case relates to CFA Institute Standard III(B): Fair Dealing, which requires CFA Institute members to deal fairly and objectively with all clients when taking investment action. Zhang’s actions violate this standard. By cross-trading securities at the bid price, rather than obtaining and using an average or midpoint between the bid and ask prices, Zhang’s use of the bid price in the transactions favored the buying clients over the selling clients. At the same time, Zhang favored the selling clients in those instances in which she successfully challenged the valuations of the securities as too low. Cross-transactions subsequently executed at these higher price levels disadvantaged Zhang’s buying clients, who ended up paying more than they would have had the bonds been available for purchase in the secondary market at terms similar to prior trades. Zhang’s disclosure of these practices would not help in this case as disclosure does not cure or excuse treating clients unfairly. It is not clear from the facts why Zhang challenged the price of the securities as too low, but this also represents a conflict of interest for Zhang in that a higher valuation presumably benefited her investment performance history. It’s also not clear that Zhang inappropriately influenced or manipulated the bond prices quoted by simply asking the brokers to reconsider their initial price. The brokers only occasionally revised the price upward. Zhang did not personally hold a controlling position but held the position by virtue of her many clients’ investments.
    Although Zhang did not benefit from the cross trades as her fees were based on AUM, Zhang failed to discharge adequately her best price and best execution obligations for her selling clients. Seeking valuation of thinly traded securities using broker–dealer quotes is appropriate; however, in this case, Zhang used quotes from the broker–dealers who were the original underwriters of the securities and not the executing broker–dealers who were trading the same or similar securities and who would have a better idea about recent bid/ask trading activity. Finally, even if the bid/ask spreads are narrower, Zhang failed to undertake any assessment as to whether the securities were available on better terms for buying clients in the secondary market. If the prices are too high, the valuation is inappropriate. Choice A is the best answer.

    This case is based on a 10 August 2018 administrative action by the US SEC.
     


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
     
  • Ethics in Practice: Assessing Hedge Funds for Investment

    25 Oct 2018
    46
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 44)
    Soto manages assets for high-net-worth individuals, family groups, foundations, endowments, and similar institutions. Many of his clients have expressed interest in investing a portion of their assets in alternative investments to boost their portfolio return. Soto recommends particular alternative assets, including hedge funds, to his clients and monitors those investments on his clients’ behalf. Soto has developed written policies and procedures that he consistently applies when evaluating potential hedge fund investments, but he does not disclose these policies and procedures to his clients. Soto generally meets in-person with the hedge fund managers at the funds’ offices to discuss their implemented investment strategy, understand the culture of the manager, have increased access to review documents, and speak with the fund’s personnel. Unless he sees a red flag, Soto does not conduct comprehensive background checks on the managers and their key personnel.
    Several of the hedge fund managers he chooses as investments for his clients have undisclosed potential conflicts of interests, such as compensation arrangements or business activities with affiliates. When choosing potential hedge fund investments, Soto ensures that the investment style of the fund is suitable for his clients and intermittently checks to verify the fund’s commitment to that style over time. Although Soto does not independently verify the funds’ relationships with service providers, such as administrators and custodians, he does carefully evaluate the auditors of the fund when he is not familiar with the auditor. Some of the funds that Soto choses as investments for his clients have multiple changes in key third-party service providers over time. Soto relies on third-party legal consultants to review legal documents to evaluate such issues as redemption terms and restrictions. Soto relies on marketing material prepared by the hedge funds to provide his clients with as accurate as possible information about the investment. What do you think of Soto’s actions?

    A.Soto’s actions are acceptable under the CFA Institute Code of Ethics and Standards of Professional Conduct.
    B.Soto’s actions violate the CFA Institute Code of Ethics and Standards of Professional Conduct. 

    ANALYSIS
    This case involves CFA Institute Standard V(A): Diligence and Reasonable Basis, which requires CFA Institute members to exercise diligence, independence, and thoroughness in analyzing investments and making investment recommendations. In choosing hedge fund investments for his clients, Soto must undertake appropriate due diligence in evaluating the funds for potential investment for his clients. Does Soto’s actions meet the due diligence and reasonable basis requirement of the CFA Institute Code and Standards? Soto takes many steps to thoroughly evaluate the hedge fund investments, including consistently applying written policies and procedures when engaging in due diligence; holding in-person meetings at the funds’ offices to understand the investment strategy, evaluate the manager, meet with key personnel, and make sure the investment is suitable for his clients; investigating the auditor of the fund when it is unfamiliar; having the legal documents of the fund reviewed; and using the funds’ own statements and promotional material in an effort to accurately describe the fund to his clients.
    But some of Soto’s actions may not have been as strong as they could be, leading him to miss potential red flags. Although he adopts due diligence policies and procedures, he does not disseminate those to clients. He does background checks of fund personnel only when he sees a “red flag” leading him to miss potential conflicts of interest on the part of fund personnel. He does not check employment history, legal and regulatory matters, news sources, and independent references of firm personnel. He checks on a fund’s strategy and suitability for his clients, but he does not regularly go back to check the fund for style drift. He does not independently verify the relationships with certain fund service providers (administrators, custodians) and looks into the auditor only when he is not already familiar with them, potentially missing business relationship or other conflicts of interests that could undermine their independence. He outsources the legal document review to a third party, which may be appropriate if Soto does not have legal expertise but could be an issue if the third-party review is not thorough or as complete as necessary. Finally, by relying on the marketing material of the fund and not creating his own independent information for his clients, he could be providing false or misleading information prepared by the fund itself. Assessing due diligence is a very facts and circumstances specific exercise. If a client were to challenge Soto’s due diligence efforts as insufficient under Standard V(A), whether his diligence is adequate would likely depend on the specific facts of the case.
    This case is based on a 2014 Risk Alert by the US SEC Office of Compliance Inspections and Examinations.
     


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Trading in Cryptocurrency OK?

    17 Oct 2018
    38
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 43)
    Santos trades digital coins on cryptocurrency exchanges for both his own account and as an investment strategy for clients who have indicated an interest in such speculative trading and for whom it is appropriate. The cryptocurrency exchanges are unregulated markets. Santos is a member of “EasyCoin,” a chatroom in which coin traders gather that has thousands of members. EasyCoin is a private chatroom accessible by invitation only and is overseen by an anonymous moderator. Generally, the chatroom moderator announces a date, time, and exchange for members to initiate trading. At the set time, the moderator informs the chatroom of the particular cryptocurrency to be traded. Traders, including Santos, buy that digital coin creating a surge in the price with the intention of attempting to sell before the price collapses. Over the past several months, 47 different cryptocurrencies have been promoted on EasyCoin and generated $357 million in trades. Santos often profits from the rise in the price of the cryptocurrency by timing his trades correctly, but occasionally he buys and holds the digital coin too long and the price drops steeply before he can sell, causing him to lose money for himself and his clients. Santos actions are

    A. acceptable because Santos, unlike the moderator of the EasyCoin chatroom, is not actively organizing the trading of the digital coin.
    B. unacceptable because Santos is engaged in market manipulation.
    C. acceptable because he voluntarily engages in this speculative trading based on information in a private chatroom.
    D. unacceptable because speculative trading cryptocurrency in unregulated markets for client accounts is unethical.

    ANALYSIS
    The facts of this case are addressed by CFA Institute Standard II(B): Market Manipulation, which states that CFA Institute members must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants. In this case, Santos, at the direction of the moderator in the EasyCoin chatroom, engages in trading with the intent to give the impression of price movement in a financial instrument. The fact that the financial instrument is a cryptocurrency trading in an unregulated market and not a conventional security trading in a public market does not affect the applicability of the standard. Although Santos is not organizing the run-up of the price for digital coin, his actions in trading the coin at the behest of the EasyCoin chatroom moderator at a particular time and on a particular market make Santos a participant in the manipulation scheme. Trading in speculative investments on behalf of himself or his clients is acceptable if appropriate and warranted by clients’ financial circumstances and risk tolerance. But engaging in fraud on the market through market manipulation is a violation of Standard II(B). The best answer is B.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Right Reasons to Transfer Retirement Funds?

    11 Oct 2018
    26
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 42)
    Reese works for Calloway Asset Management, an independent financial adviser. Calloway provides advice to its clients about whether they should switch their retirement savings from an occupational pension scheme (such as a defined pension plan) to a self-invested personal pension (SIPP), which allows investing in a wide variety of alternative investments. These investments offer the possibility for greater returns but are typically more high risk, illiquid, and esoteric, such as overseas property. Clients are directed to Reese and Calloway for advice on switching to a SIPP through an “Unregulated Introducer” who facilitates the sale of alternative investments to clients that decide to switch. The Unregulated Introducer, an affiliate of Calloway, actively promotes and introduces clients to the concept of investing in alternative investments and provides information on particular investment vehicles.
    If Reese recommends a client switch to a SIPP, the client returns to the Unregulated Introducer to purchase the alternative investments to place in his or her SIPP. The majority of Calloway’s, and thus Reese’s, clients are referred by the Unregulated Introducer. When determining whether a client should switch to a SIPP, Reese reviews the client’s overall financial circumstances, assesses the client’s existing pension provision, and evaluates the client’s attitude toward risk. But the predominant factor in Reese’s evaluation is the customer’s desire to use pension funds to purchase alternative investments.
    Therefore, for almost all of his clients, Reese recommends that they transfer their retirement savings to a SIPP. The Unregulated Introducer receives a commission fee from the alternative investment sponsors if clients purchase an alternative investment for their SIPP. Reese is a shareholder of the Unregulated Introducer and serves as a director on its board. He benefits financially from both the fees paid by clients for the advice from Calloway on whether to move to a SIPP and the commissions paid to the Unregulated Introducer for its role in the sale of the alternative investments. Reese

    A. acted properly when evaluating whether clients should switch their assets to a SIPP.
    B. may assume that his clients are aware of the affiliation between Calloway and the Unregulated Introducer.
    C. must disclose his role as a director and shareholder of the Unregulated Introducer to client’s seeking advice from Calloway.
    D. does not need to consider the suitability of particular alternative investments when recommending client’s switch their assets to a SIPP. 

    ANALYSIS
    This case involves CFA Institute Standard III(A): Loyalty, Prudence, and Care; Standard III(C): Suitability; and Standard VI(A): Disclosure of Conflicts. Under Standards III(A) and VI(A), CFA Institute members have a duty of loyalty to their clients, must act with reasonable care and exercise prudent judgment, must place their clients’ interests before their own, and must disclose any conflicts of interest. The suitability standard requires CFA Institute members to make a reasonable inquiry into a client’s investment experience, risk and return objectives, and financial restraints to determine whether an investment is suitable in the context of the client’s portfolio.

    Although Reese did inquire about clients’ relevant financial circumstances and tolerance for risk when making a recommendation about switching their assets to a SIPP, the facts indicate that the predominant factor in the recommendation was the client’s preexisting desire to purchase alternative assets. Thus, Reese’s work was not undertaken with reasonable care and prudent judgment because his evaluations and recommendations were unduly swayed by the client’s wishes rather than the financial circumstances, which means choice A would not be correct. Furthermore, knowing that clients will need to sell current investments to invest in a particular alternative asset, such as overseas property, Reese must consider the suitability of that investment when advising clients about whether to move their assets to a SIPP, so choice D is also not correct.
    It is clear that the Unregulated Introducer will only benefit financially if Reese recommends clients transfer their pension funds into a SIPP. Accordingly, Reese, by virtue of his relationship with the Unregulated Introducer, has a financial interest distinct from the client’s interest in the outcome of the advice he gives. Therefore, a conflict of interest exists between the interests of Reese in the outcome of the advice and the client’s interest in that outcome. Reese failed to ensure that his clients were informed of Reese’s and Calloway’s relationship with the Unregulated Introducer, and that they were informed of the financial benefit to Reese if the clients purchased alternative investments. This lack of disclosure prevented clients from being able to make a fully informed decision about whether to seek advice from Calloway about transferring their pension funds into a SIPP and to use their existing pension funds to purchase alternative investments. Choice C is the best answer.

    This case is based on facts from a recent Decision Notice from the UK Financial Conduct Authority.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
     
  • Ethics in Practice: Disclose Investigation to CFA Institute? 

    04 Oct 2018
    20
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 41)
    Gordon is an investment representative at Wallsend Financial Services, a mutual fund dealer. Wallsend requires its employees to disclose outside business activity for review and approval by the firm. While working for Wallsend, Gordon serves as a director on four outside boards. Gordon gets approval from Wallsend for three of the boards positions, but the fourth is for a charity called Born in the 50s to help homeless children that is run by his father. Gordon does not submit the position for approval because it is a volunteer role that he has taken only temporarily to help his father. Wallsend eventually discovers Gordon’s service on the Born in the 50s board. Wallsend is in the process of reducing their workforce, and after confirming that Gordon failed to disclose his involvement on the additional board, they terminate him for violation of their policy. Now unemployed, Gordon receives his Professional Conduct Statement (PCS) from CFA Institute. Is Gordon required to disclose the internal investigation by Wallsend concerning his nondisclosed service as a director on the Born in the 50s board?

    A. No, it was an internal matter at Wallsend, and no client was involved.
    B. No, Gordon was a volunteer and his firing was unjustified and likely driven by Wallsend’s workforce reduction motive.
    C. No, this was not a question of Gordon’s professional conduct or activities.
    D. Yes, Gordon should disclose this matter on his PCS.

    Gordon ultimately decides not to disclose the matter to CFA Institute because he believes he was wrongfully terminated. But he receives a notice of investigation from the regulator concerning his violation of Wallsend’s internal policy. Gordon decides to just settle with the regulator. He receives a one-month suspension and a fine for violating the rules pertaining to outside business activity. CFA Institute discovers Gordon’s settlement with the regulator through its monitoring efforts and initiates its own investigation. As a CFA charterholder, Gordon is required to cooperate in the Professional Conduct investigation, but Gordon wants to resign his membership to avoid the CFA Institute investigation. What are Gordon’s options?

    A. Even if Gordon resigns, he was a member and charterholder at the time of the conduct and thus CFA Institute has jurisdiction over him.
    B. If Gordon refuses to cooperate, CFA Institute can impose a Summary Suspension followed by a Revocation of Gordon’s CFA® charter.
    C. If Gordon cooperates with the Professional Conduct investigation, he will be able to tell his side of the story and contribute evidence in support of his position.
    D. All of the above apply. 

    ANALYSIS
    This case addresses issues related to the disclosure, investigation, and sanctioning of member misconduct by the Professional Conduct division of CFA Institute. Regarding whether Gordon must disclose Wallsend’s internal investigation on his PCS, the correct answer is yes, thus in the first set of multiple choice answers, choice D is the right decision. Choice A is incorrect because even if it was an internal matter at Wallsend and no client was harmed, the PCS contains six questions and the second question requires a yes response if you have you been “the subject of any investigation (internal or external) in which your professional conduct or activities were questioned or at issue.” Choice B is also incorrect because the issue is not whether Gordon was justified in his actions or whether his employer had an ulterior motive, the issue is whether there was in fact an internal investigation by his employer involving his professional conduct or activities. And choice C is incorrect because although Gordon may disagree that the temporary volunteer work for his father constitutes a professional activity that needs to be reported, his employer obviously thought it was an activity that needed to be reported. Therefore, the Wallsend investigation needed to be disclosed regardless of its merits.
    Regarding the second set of multiple choice answers, choice D is again the right decision because this time, answers A, B, and C are all true. Under the CFA Institute Rules of Procedure, CFA Institute has jurisdiction over Gordon because he was a member and a charterholder at the time of the conduct. If Gordon refuses to cooperate, CFA Institute will proceed with a Summary Suspension, which will lead to a printed Notice of Disciplinary Action followed by a Revocation. Finally, if Gordon cooperates with the Professional Conduct investigation, he will be able to tell his side of the story and contribute evidence in support of his position.
    This scenario is based on a real case handled by the Professional Conduct division at CFA Institute. A Disciplinary Review Committee found that the member violated the following Standards: I(A): Knowledge of the Law, IV(A): Duty to Employers– Loyalty, and VI(A): Disclosure of Conflicts. The member in the actual case did in fact disclose the matter on the PCS and in a timely manner. Therefore, there was no violation of Standard VII(A): Conduct as Participants in CFA Institute Programs, which makes it a violation to misrepresent information on a PCS.

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
     
  • Ethics in Practice: Expenses Billable or Not Billable? Case and Analysis

    28 Sep 2018
    124
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 40)

    Braun and his firm are hired by a regional government to serve as its financial adviser for issuing general obligation bonds. The municipality conducts several bond offerings over a number of years for constructing a number of municipal facilities, including a maximum security detention facility and two school buildings. In connection with the bond issues, Braun makes a number of trips to New York City to meet with ratings agencies in connection with these offerings. The trips are typically planned for a Monday or Friday so Braun can obtain the cheapest travel costs. Braun’s wife accompanies him on the trips and they typically spend the weekend either before or after the meetings in New York City to enjoy sporting events, theater performances, and museums. Braun often makes a number of flight and hotel changes after a trip is booked to accommodate meetings with other clients. Braun submits his trip expenses to his supervisor who deducts trip costs she believes are unrelated to the business purpose of the trip and submits the bills to the municipality for reimbursement. Which of the expenses below can most likely be billed to the client—for example, the government entity issuing the bonds?

    A. Braun’s accommodation and meal expenses for the weekend days because the travel rates are cheaper over a weekend.
    B. Tickets to the sporting and theater events, as long as they do not exceed an amount for reasonable business entertainment.
    C. Flight and hotel change fees that result from the regular course of Braun’s business activities.
    D. The travel and accommodation expenses for Braun’s wife if he discloses to his supervisor that she is making the trips and receives written approval for her travel. 

    ANALYSIS
    This case relates to CFA Institute Standard III(A): Loyalty, Prudence, and Care, which states that members have a duty of loyalty to their clients, must act for their clients benefit, and must place client interests before their own interests. Under this standard, investment professionals, including municipal security dealers, must not engage in any deceptive, dishonest, or unfair practice when handling client accounts. Charging excessive or lavish expenses for the personal benefit of the investment professional at the expense of the client can constitute a deceptive, dishonest, or unfair practice that violates Standard III(A). All of the expenses incurred by Braun can, in some way, be considered personal or business-related expenses that should not be charged to the municipality seeking to issue the bonds.
    In the context of conflicts of interests, the CFA Institute Code of Ethics and Standards of Professional Conduct allow members to accept or provide modest gifts and entertainment done in the ordinary course of business (a gift basket at the holidays from a vendor or to a client, for example). But that “ordinary course of business” does not allow investment professionals to charge clients for obviously extraneous entertainment expenses tangentially connected to a business meeting. Even if Braun notified and received permission from his employer for his spouse to accompany him on the business trip, that permission cannot extend to treating the client unfairly by charging the client for the spouse’s expenses. And although busy investment professionals may be forced, by other priorities, to change travel arrangements when a trip on behalf of a client has already been scheduled, additional expenses resulting in the change most likely must be borne by Braun as an overhead cost, not charged to the client. (Under some limited circumstances, those expenses might be charged to the client necessitating that the travel changes be made).
    It is possible that the savings in travel fees for booking a weekend travel schedule is greater than the additional accommodation and meal expense for Braun to stay in New York City the extra days, making the cost to the client lower. If this is the case, Braun would be meeting his duty of loyalty to the clients by choosing the most inexpensive travel schedule overall, thus limiting costs to the client. Under these circumstances, choice A describes the expenses most likely to be able to be billed to the client.
    This case is based on an enforcement action by the US Financial Industry Regulatory Authority (FINRA).

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
  • Ethics in Practice: Sharing CFA® Exam Experience Is Fine, Right?

    20 Sep 2018
    25
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 39)

    Taveras is a CFA® charterholder who leads an exam preparation course given by his local CFA® Society for candidates in the CFA® Program. The society hosts a celebration for the students after the exam is over. During the celebration, a number of Taveras’s students describe their experience sitting for the exam. Most give their opinion about the relative difficulty of the exam given their expectations and some describe their surprise about areas of the curriculum that were not tested. Taveras asks his students their opinion on the most difficult questions on the exam. Taveras

    A. is free to pass along information about the exam to candidates in future prep classes to help prepare them for the exam.
    B. can provide the opinions of his students about the difficulty of the exam to candidates in future prep classes to emphasize the need to thoroughly prepare.
    C. can solicit information about the exam questions from students in an effort to improve the course for future prep classes.
    D. must not discuss the exam with students after it is over.

    ANALYSIS
    This case relates to CFA Institute Standard VII(A): Conduct as Participants in CFA Institute Programs, which states that candidates must not engage in any conduct that compromises the integrity, validity, or security of CFA Institute Programs. It is natural and expected that a group of colleagues who have collectively gone through the rigorous process of studying for and taking the CFA® exam will want to celebrate the accomplishment and discuss the exam after it is over. Candidates can discuss their exam experience with Taveras in general terms. But they cannot provide specific information about the exam regarding the questions or the general areas tested.
    And Taveras cannot pass along that information to future candidates and should not be soliciting information about specific questions or he would be in violation of the standard, which is designed to protect the integrity and security of future exams. The best answer is B because it is acceptable for Taveras to advise future prep classes that his previous students found the CFA exam to be more difficult than expected, so they should study the curriculum and prepare as much as possible.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
  • Ethics in Practice: Does Trade Execution Venue Matter?

    13 Sep 2018
    131
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 38)

    Eller is the head trader for a large, global investment adviser and broker/dealer firm. Eller executes the majority of customer orders internally but routes a significant portion of orders to other, outside broker/dealers for execution. Over a period of five years, Eller and the firm routed to outside venues 15.8 million orders that involved 5.4 billion shares worth more than $141 billion. Eller and the firm do not inform clients that trades are sometimes executed using outside venues. Eller’s actions are

    A. appropriate as long as Eller obtained best execution for the clients wherever the trade was executed.
    B. inappropriate because Eller is misleading clients regarding a material aspect of the investment process.
    C. appropriate because order execution venue diversification is an insignificant and routine aspect of the investment process.
    D. inappropriate because using outside broker/dealers to execute client trades could distort market prices.

    ANALYSIS
    The execution of trades is a material aspect of the investment process. Investors can use the execution venue information provided by the firm to make strategic choices about their broker/dealer relationships and tactical routing decisions. Investors may also not want their orders routed to outside venues because it exposes important information about their investment strategy. In addition, listing outside trade executions as having occurred within the firm gives the misleading impression that the firm is a more active trading center than it actually is. Using outside broker/dealers is not, in and of itself, unethical and does not necessarily lead to distorting the market. Eller’s ability to obtain best execution for these trades does not absolve him of misleading the firm’s clients regarding a material aspect of the investment process. By providing inaccurate information to clients about how their trades were executed, Eller violated Standard I(C): Misrepresentation, which prohibits CFA Institute members from making any misrepresentation relating to investment actions. The best choice is B.

    This case is based on a recent enforcement action and penalty by the US SEC.
     
    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
  • Ethics in Practice: Longtime Customers Can Be Trusted, Right?

    06 Sep 2018
    15
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 37)
    Smith-Pelley is president and CEO of Capital First Investment Group (CFIG), an investment adviser that is a wholly owned subsidiary of Capital First Bank. CFIG uses the 25 branch offices of the bank for its business locations. One client of CFIG, a longtime bank customer and personally known by Smith-Pelley and the board members of the bank, opened an investment account at CFIG with the stated investment objective of income. Although the client did make a few investments over the course of a year, the client engaged in almost exclusively banking activity in the account that involved hundreds of transactions and consisted of $90 million in deposits and $84 million in withdrawals.
    The transactions included electronic transfers to and from individuals and entities located in bank secrecy havens or countries identified by the government as presenting a money laundering risk. In addition, Smith-Pelley understood the client to be engaged in a type of international business activity that presented an increased risk of transactions being tainted by corruption or bribery. But because of the client’s longstanding relationship with the bank, Smith-Pelley presumed that the transactions had a legitimate business purpose. Smith-Pelley accepted vague descriptions of the transactions as “for services provided,” “consulting fees,” or “commissions,” and he approved the daily anti money laundering (AML) reports (required by law when transactions trigger red flags of potentially suspicious activity) without further investigation. Smith-Pelley’s actions are

    A. appropriate because the non-securities activity in the client’s CFIG account was consistent with the type of transactions he had engaged in at the bank for many years.
    B. appropriate because Smith-Pelley is protecting the confidentiality of client information.
    C. appropriate because Smith-Pelley can rely on the clearing firm to report suspicious activity for the account.
    D. inappropriate. 

    ANALYSIS
    The facts presented in this case should have raised a number of questions for Smith-Pelley regarding the legitimacy of the client account at CFIG. The high velocity of money movement and low volume of investment activity was inconsistent with maintaining a securities account for the purpose of generating income, as stated in the account documents. The transactions in the account were high-risk transactions for money laundering activity and should have raised a greater level of scrutiny. Rather than investigate as required by law, Smith-Pelley did not ask questions because of the client’s long-standing relationship with the bank.
    Smith-Pelley cannot rely on the clearing firm to meet CFIG’s independent obligation to review the transactions for suspicious activity. Duty of loyalty to clients and preservation of confidentiality of client information cannot be used as a shield to allow clients to violate the law or otherwise damage the integrity or viability of global capital markets. Smith-Pelley’s actions violated Standard I(A): Knowledge of the Law which states that CFA Institute members and candidates must understand and comply with all applicable laws, rules, and regulations covering they professional activities. Smith-Pelley’s failure to adequately comply with the anti-money laundering requirements imposed by law violates this standard. The best choice is D.

    This case is based on a June 2018 enforcement action by the US Financial Industry Regulatory Authority.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
  • PRACTITIONER’S BRIEF: THE GOOD, THE BAD, AND THE MOSTLY BENIGN: RECONCILING HIGH-FREQUENCY TRADING’S MISUNDERSTOOD REPUTATION

    04 Sep 2018
    7593
    0

    This article qualifies for 0.5 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    Based on the paper “Heterogeneity in How Algorithmic Traders Impact Institutional Trading Costs” by Tālis J. Putniņš and Joseph Barbara, available at https://www.arx.cfa/post/Heterogeneity-in-how-algorithmic-traders-impactinstitutional-trading-costs-4550.html

    This paper was recently recognized for excellence by the CFA Institute Asia-Pacific Research Exchange (ARX) at the 7th Annual Financial Research Network (FIRN) Conference. FIRN is a network of finance researchers and PhD students across Australia and New Zealand.

    Traversing the dense, tangled underbrush of an otherwise mostly explored section of securities terrain—the impact of automated, computerized trading—two researchers have demonstrated why it doesn’t pay to ignore the nuances of a complicated subject. Literally, it can cost billions to not heed the observations of authors Putniņš and Barbara, whose paper, “Heterogeneity in How Algorithmic Traders Impact Institutional Trading Costs,” is the subject of this ARX Practitioner’s Brief.

    The July 2017 paper is a wake-up call for institutional investors who may not be as vigilant as they think they are when it comes to getting best execution on block orders, if only because their defenses might well be focused on the wrong bad actors, that is, high-frequency traders (HFTs). HFTs, argue Putniņš (University of Technology Sydney) and Barbara (Australian Securities and Investments Commission), are unfairly stigmatized and singled out among computer-program–based or algorithmic traders (ATs) for driving up big-block trade implementation costs when in reality, according to an exhaustive study of trading data, their impact is negligible.

    In support of their argument, Putniņš and Barbara fully mapped and surveyed an algorithmic trading community comprising both HFTs, who transact a large number of orders at eye-blink speeds, and non-HFTs. In the process, they uncovered a variety of species and motives, some of which are even beneficial to institutions. On the surface, the ground the authors covered would seem cut and dried: grievances about HFTs have been voiced repeatedly, to the point where no one questions who in this narrative wears the black hat and who wears the white.

    What the authors sought to understand was whether the complaints against HFTs had merit. Was there more to the story than what generally has seeped into the mainstream media via books such as Michael Lewis’ Flash Boys?

    WHAT’S THE INVESTMENT ISSUE?
    The rise of electronic equity trading venues at the dawn of the 21st century emptied the trading floors, drove down execution costs, and opened the way for technological advancements, such as order-implementation speeds measured in milliseconds, that few could have ever imagined. By the time of the 2010 flash crash, the fundamental manner by which stocks were traded had radically changed. Although a few die-hard specialists were still clinging to their Big Board posts back on that spring day in 2010, the flash crash made it abundantly clear that algorithms had taken over. At the center of regulatory scrutiny post-flash crash was high-frequency trading, the best-known and most controversial form of algorithmic trading.

    With alpha scarce and trading venues fragmented, fund managers increasingly focused their energy on improving execution costs. For decades, the buy side railed against specialists front-running their institutional orders. Now, institutions face a new predator on their blocks: HFTs. These automated strategies account for more than half of the total volume during any given session, and some institutional investors claim they impede liquidity.

    As a result of concerns about being preyed upon, institutional investors are forced to break large orders into smaller pieces that need to be traded across multiple venues, making them more susceptible to HFTs. In turn, new liquidity pools and networks have been created to provide a safe space. Yet, as Putniņš and Barbara point out, some studies show that, at best, high-frequency trading and algorithmic trading lower spreads and improve price discovery, and at worst, represented a benign force. So are HFTs good, bad, benign, or what?

    HOW DO THE AUTHORS TACKLE THIS ISSUE?
    Putniņš and Barbara created a data cross-section reenacting trading of the largest 200 Australian equities (ASX 200 Index constituents) over a 13-month period (1 September 2014 through 30 September 2015), amounting to 273 trading days.

    Using unique trader-identified regulatory audit-trail data, they identified a subset of 187 of the most active nondirectional traders (AT/HFT) and measured their activity (roughly 25% of Australian volume on any given day) in terms of the impact on the execution costs for institutions, which control about 80% of Australian large-cap stocks. “Origin of order” identifiers, collected by the Australian Securities and Investments Commission, allowed the authors to reassemble smaller (child) orders back into larger (parent) ones.

    Upon close inspection, the AT/HFT gang of 187 proved decidedly heterogeneous. Putniņš and Barbara categorized these traders across a spectrum, ranging from those who drove costs up the highest (toxic) to those who lowered them the most (beneficial).

    WHAT ARE THE FINDINGS?
    The 12 most toxic traders increased the average order-implementation shortfall cost by 10 basis points or nearly double the cost without the harmful behavior. At the same time, the 14 most beneficial traders systematically decreased costs, effectively, in aggregate, countering the negative impact. However, this offset in aggregate would not have come as any consolation to those individual buyers and sellers specifically impacted by the toxic traders. “An investor that disproportionately interacts with harmful AT/HFT faced higher costs,” concluded the authors.

    Interestingly, HFTs were no more likely to be toxic than non-HFTs. And even those ATs/HFTs who drove up costs may have done so unintentionally, merely by trading on the most common entry and exit signals, behavior that could be described not so much as exploitative as lemming-like.

    WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
    First, for buy-side asset managers, it bears underscoring that execution matters. Potentially large cost savings can be realized from trading in a manner that avoids overexposure to toxic counterparties. Such savings could mean the difference between a fund that performs well and one that underperforms.

    Second, in terms of execution strategy, more caution should be exercised in smaller stocks, where toxic traders tend to be more active.

    Third, effort spent avoiding HFTs may be in vain because many HFTs are beneficial and can reduce institutional execution costs. At the same time, toxic non-HFTs should be avoided if one wants to minimize execution costs.

    Finally, from a regulatory perspective, the empirical measurement tools featured in this research could be used to better monitor markets and identify predatory trading behavior.

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 

    Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.
  • Ethics in Practice: Tell Potential Client of Staff Change?

    02 Sep 2018
    138
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 36)

    Andersen is the President and CEO of an asset management firm. Andersen and other senior investment managers of his firm make an in-person pitch to manage the investments of a large pension plan. In response to a request from the pension plan, Andersen lists the key personnel that would be involved in offering these services. But while awaiting for the outcome of the evaluation, one of the key personnel that Andersen identified and who was part of making the in-person presentation to the plan leaves the firm. Andersen should

    A. Hire a competent replacement for the person who left and then inform the pension plan of the change.
    B. Wait to determine whether the firm wins the business of the pension plan before informing them of the change in staff.
    C. Immediately inform the pension plan that one of the key personnel has left the firm.
    D. Do nothing because the pension plan is hiring the asset management firm not an individual.

    ANALYSIS
    This case relates to CFA Institute Standard I(C): Misrepresentation, which prohibits any knowing misrepresentation relating to professional activities. In this situation, after making the pitch for the investment management business of the pension fund, there is turnover in Andersen’s investment management staff. Andersen has identified the person leaving as a key employee and as a member of the team that made the initial presentation to the pension plan. From Andersen’s perspective, he surely has confidence in the abilities of the firm as a whole and will likely replace the person leaving with a competent professional with similar experience and talents so that there is a seamless transition in services to clients.
    Nevertheless, the pension plan is clearly concerned about the particular personnel involved in managing its assets because they asked for that information, which makes C the best response. If this was a junior employee, a staff member who had limited effect on the investment decision-making process, or someone who was not listed as a key employee or who was not part of the team making the presentation, then Andersen may not have to provide an update to the pension plan. But given the circumstances outlined in the case, Anderson must tell the pension plan about the departure of a key staff member to avoid a misrepresentation. Waiting until the replacement is found or until the pension plan makes a hiring decision is too late.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
  • Ethics in Practice: Using Info for Fund and Personal Accounts OK?

    23 Aug 2018
    188
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 35)

    Eaton runs a hedge fund that holds the commercial paper (CP) of a listed company. The fund also has a large investment in the equities of that company. Upon maturity of the CP, the company fails to honor the CP and refuses to communicate with Eaton. Based on these facts combined with further research indicating that the company may be having liquidity issues, Eaton sells the fund’s equity position. Eaton also shorts the company’s stock in his personal account. Select one of the following answers and then join the conversation to explain your choice.

    A. Eaton violated the Code and Standards by selling the fund’s equity position in the company.
    B. Eaton violated the Code and Standards by shorting the company’s stock in his personal account.
    C. Eaton violated the Code and Standards by both selling the fund’s equity position in the company and shorting the company’s stock in his personal account.
    D. Eaton did not violate the Code and Standards.

    ANALYSIS
    This case involves CFA Insitute Standard II(A): Material Nonpublic Information, which prohibits trading or causing others to trade on material nonpublic information. Information is considered “material” if it is likely to affect the price of a security. It is considered “nonpublic” if is not widely disseminated. But under the mosaic theory, those who work to uncover and piece together nonmaterial and/or public information to form an opinion about a security can trade based on significant conclusions derived from that analysis. In this case, the fact that a company has defaulted on its commercial paper commitment would likely be a material fact that a reasonable investor would like to know. It is also likely that information regarding the default, at least initially, is not publicly known. The CP is privately traded, and this information may be available only to the holders of the CP.

    Eaton becomes aware of the default because his hedge fund owns the CP, and thus he becomes immediately aware of the default when it occurs. The fund is in a unique position to be the first to be aware of the cash flow problems of the company. Does the fund have to wait to trade on the information until it becomes publicly known? This situation is similar to the case in which a customer orders goods from a manufacturer who does not deliver on time. The customer is in the best position to know that the manufacturer defaulted on the contract and thus have an early understanding of the difficulties the company is having. The informational advantage arises from a learned fact as a result of the proximity to the company, not because of any inside information. Intrepid analysts are likely to discover the information eventually. Eaton’s hedge fund is the first to do so given their relationship with the company. But even if Eaton’s hedge fund is able to trade on the information, Eaton’s investment action for his personal account is likely in violation of the standards because he is taking inside information that is confidential to the hedge fund and using for personal gain. The best choice in this case is B.
    This case was submitted to CFA Institute by an “Ethics in Practice” participant.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
  • Ethics in Practice: Doing Too Much to Make Investments a Success

    09 Aug 2018
    138
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 33)

    Corrales manages a hedge fund that seeks out investment opportunities in developing markets. Using assets of the fund’s investors, the fund hires local companies to serve as “sub-advisers” to explore and obtain promising investment opportunities and navigate local laws and regulation. The sub-advisers often have very limited experience as financial consultants or advisers but do have close relationships and connections with local high-ranking government officials. The payments made by Corrales, through the sub-advisers, often cover substantial “deal fees” and other expenses that facilitate governmental support of each investment. Corrales does not require the local business partners to provide details of their activities or what specific expenses are covered by the fees. Corrales reports these expenditures to fund investors as operating expenses necessary to the success of the investment. Over several years, the hedge fund is very successful producing an 18% annual rate of return for its investors. Did Corrales actions violate the Code and Standards?

    A. Yes.
    B. No because it is acceptable to hire sub-advisers and business consultants to assist in procuring investment opportunities and managing specialized assets.
    C. No because the payments to the sub-advisers represent legitimate expenses to ensure the success of investments and protect the interest of investors.
    D. No, as long as the sub-advisers provide more detail about the nature and purpose of the payments and this information is disclosed to the hedge fund investors. 

    ANALYSIS
    To better serve clients, investment professionals may choose to delegate to third parties work that requires particular specialization, knowledge, or expertise. For example, an investment adviser may hire sub-advisers to handle a particular strategy or investment style outside the scope of the adviser’s ability or experience. A global adviser may hire a sub-adviser to manage an asset allocation invested in a particular market, and the payments to the sub-adviser would be legitimate investment expenses that could properly be passed on to investors in the fund.
    But the facts of this case indicate that Corrales is not hiring a true sub-adviser but essentially paying locally connected officials to secure access to investment deals to ensure the success of the fund’s investments. The “sub-advisers” have no financial experience but are close to the government officials, and the “deal fees” are not supported by any documentation that details legitimate investment expenses. The “operating expenses” charged by Corrales to the fund are most likely funding corrupt transactions and bribes through local intermediaries. This practice violates multiple standards:
    • I(A): Knowledge of the Law because the conduct would violate any type of anti-bribery laws.
    • I(C): Misrepresentation because he is improperly labeling the expenditures as investment fees.
    • V(A): Diligence and Reasonable Basis because no reasonable and adequate basis for the “investment” action exists.
    • V(C): Record Retention because no appropriate records are being kept to support the action.
    • VII(A): Conduct as Participants in CFA Institute Programs because assuming Corrales is a charterholder, his conduct compromises the integrity to the CFA designation.
    This case is based on a US SEC enforcement action from 2017.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
  • CFA Societies Asia-Pacific Ethics Survey 2018

    06 Aug 2018
    1317
    27

    In March 2018, in collaboration with CFA Institute, CFA Societies in Asia-Pacific surveyed their members to uncover common ethical issues seen in the investment industry, and to identify what resources could support better ethical decision making and a more ethical firm culture.

    The attached reports are the findings from the survey.
  • Corporate Governance for Asian Publicly Listed Family-Controlled Firms - Full Report

    Tom Berry    Tony Tan, DBA, CFA, Fianna Jurdant
    06 Aug 2018
    5942
    119

    There is a gap in the literature concerning regulatory responses and approaches to corporate governance of controlled family firms. This report reviews the literature to develop an overview of the economic landscape of publicly listed family firms in Asia and to demonstrate the importance of these entities to the region and beyond. Another objective is to illustrate the challenges that confront policymakers in developing corporate governance policies relevant to publicly listed family firms. Discussion in the report indicates two significant hurdles for policymakers. First, there is a lack of consensus on a universal definition of a publicly listed family firm. Second, publicly listed family firms should not be perceived as a homogeneous group over which a “one size fits all” corporate governance blanket can be cast.

    The focus of the report then shifts to highlighting how an effective corporate governance system can improve performance and create value by reducing the cost of equity and reducing capital waste. The discussion examines how properties of publicly listed family firms can enhance shareholder wealth or lead to the expropriation of wealth from minority owners. The final objective of the study is to report key observations from a series of case studies spanning 14 Asian economies that cover a range of corporate governance issues central to publicly listed family firms. The case studies provide insight into current practices of Asian publicly listed family firms that may require the attention of policymakers. The issues raised in this report provide the initial building blocks for developing a more extensive road map to underpin a comprehensive analysis. Findings from this analysis can provide the foundation for evidence-based policy recommendations specific to family firms, which are a significant aspect of the Asian economic landscape and a key to the region’s current and future prosperity.

    This article qualifies for 0.5 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.

     
  • PRACTITIONER’S BRIEF: CYCLE SPOTTING—HOW AND WHEN MACRO SIGNALS CAN PREDICT CURRENCY RETURNS

    Joseph Wong    Rich Blake, Brindha Gunasingham, PhD, CFA
    30 Jul 2018
    21191
    0

    Based on the paper “Business Cycles and the Cross-Section of Currency Returns” by Steven J. Riddiough and Lucio Sarno, available at https://www.arx.cfa/post/Business-Cycles-and-the-Cross-Section-of-Currency-Returns-3883.html

    This paper was recently recognized as the CFA Institute Asia-Pacific Research Exchange Best Paper at the 7th Annual Financial Research Network (FIRN) Conference. FIRN is a network of finance researchers and PhD students across Australia and New Zealand.


    Originally published in the spring of 2017 and recently updated, “Business Cycles and the Cross-Section of Currency Returns,” by co-authors Steven J. Riddiough (University of Melbourne) and Lucio Sarno (Cass Business School and CEPR), makes a case for a genuine connection between currency returns and the waxing and waning of countries’ business cycles worldwide. According to Riddiough and Sarno, excess returns can be gleaned—and quantified in a risk-compensation context—by buying and selling a crosssection of currencies relative to the strengths or weaknesses of their country’s economic cycles, a finding that flouts decades of research suggesting the absence of a link between
    macroeconomic variables and currency fluctuations.

    Among the drivers of such a strategy is the use of the spot exchange rate, demonstrably more 
    predictable than interest rate moves. Also crucial to understanding the source of returns is the observation that the most robust currency appreciations occur when cross-border business cycles are diverging. Although buying the currencies of strong economies and selling the currencies of weaker ones might seem intuitive, there is no shortage of real or theoretical headwinds facing anyone who might attempt it. The spot market is notoriously and exceptionally volatile, and the nature of forecasting business cycles represents its own deeply explored yet only partially understood pursuit. Empirically, Riddiough and Sarno have tilled new ground.

    WHAT’S THE INVESTMENT ISSUE?
    In their paper, Riddiough and Sarno refer to academic research that supports the notion of a strange disconnect between macro fundamentals and currency exchange rate moves, particularly in short (one month) and intermediate (one year) time horizons. Why wouldn’t a country’s economic growth rate underpin—or indeed, help predict—the fluctuation of its currency, just as a company’s fundamentals would have an influence on share price? With this counterintuitive reasoning as a talisman, Riddiough and Sarno embark on a journey to resolve what others before them have found so puzzling. Employing that broadest measure of macro conditions—the business cycle—they examine how this basic concept gets measured in the first place, whether it even can be measured, and, if so, whether there is some way to harness it for alpha production.

    HOW DO THE AUTHORS TACKLE THIS ISSUE?
    Step one for Riddiough and Sarno was to determine how best to take the extensive data from a cross-section of 27 countries over three decades and come up with a measure of when each country’s business cycles started, when they halted, and how long they lasted. Even arriving at a commonly accepted measure for business cycles—the so-called “output gap,” which is a country’s percentage deviation from its long-term trend—proved challenging. Leaving aside the not-uncommon idea that cycles are too mercurial to pin down, there was the vexing conundrum of sifting through and amalgamating various output-gap measurement techniques (quadratic data-spanning filters versus linear counterparts). The authors needed to produce a drop cloth of macroeconomic conditions
    upon which to portray a currency trading strategy conducted in a long-term portfolio setting. By running numbers through the prism of a series of five simulated portfolios (set up in contrast, with degrees of weak and strong currencies), the authors were able to take into consideration such concepts as relative performance, risk compensation, and diversification benefits that could be associated with currency returns. In other words, this was no carry trade. The question then became, “If business cycles could predict currency returns in a portfolio setting, could an investor capitalize?”

    WHAT ARE THE FINDINGS?
    Spot exchange rate predictability was evident in both a cross-section and a time series analysis of the countries’ business cycles. In summary, buying and selling based on business cycles not only generated high returns but the outperformance was not correlated with the most common currency strategies, such as long Australian dollar/short Japanese yen. According to the authors, “Currencies issued by strong economies (high output gaps) command higher expected returns, which compensates more risk-averse investors in weak economies.” The authors go on to say, “Our research suggests a strong predictive link from business cycles to currency returns, and raises questions as to why our results differ from those in the long-standing international macroeconomics literature.”

    One reason may lie in the use of spot rate moves to extract excess return, and not via commonly used derivatives. In the aforementioned carry example, the trade would remain static; those long and short positions wouldn’t change over time even though business cycles or output gap differentials would.

    “An output-gap investor would have taken long and short positions in both the Australian dollar and Japanese yen as their relative business cycles fluctuated,” the authors claim. Returns, they emphasize, mainly come from the divergence in business cycles. Using data and a rigorous process, investors can define cycles and exploit their turns.

    WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
    Where once investors had only a few “risk factors” to choose from—growth, momentum, size, and value—now they have dozens and must add business cycles to the growing list. Because an output-gap strategy has such low correlation with other currency strategies, investors who once only considered currency exposure as something to be hedged might be open to using it as a source of alpha generation, particularly at a time when large segments of the stock and bond markets are reaching boiling points and perhaps pointing toward the start of a new set of intraglobal cycles to come.

    “At the heart of almost any model of currency returns is a tight link between the macroeconomy and exchange rate returns,” Riddiough explained recently in an email. “But it’s taken a long time to pin down this relationship empirically. In this paper, we’ve demonstrated that the link is real, spot returns are predictable, and the resulting investment strategy is unlike any we commonly employ in currency markets.”

    Riddiough and Sarno have found a relationship between macro fundamentals and exchange rates—a unique, underexploited source of returns. The analysis has been completed using data from markets around the world, including Australia, Japan, and New Zealand, demonstrating that this is not a phenomenon confined to the United States or even the Eurozone. Global and Asia Pacific investors, hungry for diversification, should take note.


    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.

    This article qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.

     
  • Leviathan Inc. and Corporate Environmental Engagement (Video Presentation)

    25 Jul 2018
    5868
    0

    State-owned enterprises (SOEs) have been criticized for poor governance and questionable efficiency. In a recent paper titled ‘Leviathan Inc. and Corporate Environmental Engagement,’ Dr. Pedro Matos from the Darden School of Business, University of Virginia, and his colleagues from the University of Hong Kong and Singapore Management University conducted an international study of the impact of state ownership on a firm’s engagement in environmental, social, and governance (ESG) issues. 

    There has been significant debate on the effects of ESG issues on shareholder value. In this paper, it was found that SOEs are, in fact, more engaged in environmental issues and, more importantly, this engagement does not come at the expense of shareholder value. Furthermore, SOEs are also more engaged in social issues, but they do not reveal better corporate governance performance.


    This is a recording of the presentation hosted by CFA Institute, HKSFA, ACCA, FSDC, HKIRA, and HKU SPACE Executive Academy on June 6, 2017 at HKU SPACE Po Leung Kuk Stanley Ho Community College in Hong Kong.
     
  • Ethics in Practice: Comment on Facebook Your Responsibility?

    19 Jul 2018
    18
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 30)


    Wieters runs an investment advisory firm that specializes in equity only asset management. For clients and prospective clients seeking to follow a balanced or fixed-income strategy, Wieters posts on her firm’s Facebook page the names of a number of firms that she is familiar with that provide these services. One of the firms replies in the comment section of the post, providing basic performance history information and claiming compliance with the GIPS® standards. Unknown to Wieters, the performance history is misleading and the claim of compliance with the GIPS standards is inaccurate. Has Wieters violated the CFA Institute Code and Standards?

    A. Yes because Wieters must exercise diligence and have a reasonable and adequate basis for every statement made on her firm’s Facebook page.
    B. No as long as Wieters does not receive referral fees from the adviser for including the adviser’s information in the original post.
    C. Yes if Wieters “likes” the post by the adviser containing the erroneous information.
    D. No because Wieters is not responsible for any information posted by third parties in the comment sections of her firm’s Facebook page. 

    ANALYSIS
    This case involves CFA Institute Standard I(C): Misrepresentation, which states that CFA Institute members and candidates must not knowingly make any misrepresentation relating to investment analysis, recommendations, or actions. Wieters has the responsibility under Standard I(C) to make sure that any professional communications she puts out are not misleading, whether or not the statements are verbal, written, or posted on social media. In this case, although the misleading statements are posted on the social media platform that Wieters controls, the misleading statement is clearly made by someone else because it is in a comment written by another person.
    Therefore, Wieters may not be considered responsible under the CFA Institute Code and Standards for verifying the truthfulness of others information. In providing a list of potential service providers for a style of investment she does not provide, it is not clear whether she is recommending the services of those firms in her post. A recommendation of services would be a step that moves Wieters closer to endorsing the misleading information rather than passively allowing comments by others on her social media account. The payment of referral fees (or no payment of referral fees) is not relevant to the misrepresentation issue. Wieters would be in danger of violating the Code and Standards if she knows the adviser’s information to be false and allows it to remain on her Facebook page. It is, therefore, not the case that Wieters is never responsible of any information posted by another person on her page. (In this scenario, the facts are clear that she does not know that the performance history and claim of compliance with the GIPS standards are false.)
    Answer C is actually the best answer because if Wieters “likes” the adviser’s comment or responds in another way that indicates she explicitly or implicitly endorses, adopts, or approves the content of the comment, that would effectively be a communication made by Wieters. She would then become responsible for the content. By “liking” the adviser’s misleading performance information, Wieters becomes the author of a separate and distinct communication that includes misleading statements. To be safe, best practice would be for Wieters to remove from her Facebook page any potentially problematic or unverified statements or comments made by others until she can determine the veracity of those statements.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
     
  • Ethics in Practice: Compliant with Record Retention Standard?

    12 Jul 2018
    44
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 27)
    Ianetta is the chief compliance officer for Rocky Mountain Investments (RMI). He is responsible for establishing and maintaining appropriate regulatory compliance policies, including a document retention policy. RMI’s policies require retaining and archiving the emails of the firm’s personnel. RMI has rapidly expanded over the years, and Ianetta determines that the firm should move to a new and less expensive email archive provider. But during the transition, several thousand emails are temporarily inaccessible. In addition, the new system does not capture emails from accounts hosted on an external server, and it does not archive emails sent from a third-party provider’s application (“cloud” email). Do Ianetta’s actions comply with the CFA Institute Code and Standards?
    1. No because the record retention system Ianetta implemented is inadequate.
    2. Yes, as long as the inaccessible emails are able to be recovered.
    3. Yes because emails sent and received outside RMI’s email system are not required to be retained.
    4. Yes, if the emails are more than five years old.
    ANALYSIS
    The issue in the case involves record keeping. CFA Institute Standard V(C): Record Retention states that CFA Institute members must “develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.” Emails to and from firm personnel are important records of the firm’s business. As the firms’ chief compliance officer, Ianetta has the responsibility to develop policies and procedures to meet the record retention requirements for RMI. The emails of firm personnel must be preserved regardless of what email service or platform is used to generate them. The requirement is not limited to only emails sent and received through the firm’s internal server.
    Guidance for Standard V(C) recommends that records be retained up to seven years in the absence of regulatory requirements. It is not clear what regulatory regime RMI is subject to if any, but best practice would be to keep seven years of the email records. The facts state that during the transition to the new email archive service provider, the records (emails) were temporarily unavailable, although it is not clear for how long. But even if the records are not available for a short time, it would be unacceptable. Lack of access to records for any amount of time could certainly cause issues with clients and regulators who may be wanting to review emails to substantiate investment recommendations, confirm communications, examine client/adviser discussions, and so on. Therefore, by not adequately fulfilling his responsibility to maintain appropriate records for RMI, Ianetta is in violation of Standard V(C), so the best answer is A.
    The facts of this case are based on a 2013 enforcement action by the US Financial Industry Regulatory Authority.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
  • Ethics in Practice: Valuing Assets and Calculating Fees

    12 Jul 2018
    51
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 29)

    Maalouf works in a branch office for a large wealth management firm. The firm’s fees are based on a percentage of the value of the assets managed in each client account. The firm has a standard method for valuing assets and calculating fees for all of its clients, which is disclosed to each client at the outset of the relationship. Over time, the firm transitions to (1) using the market value of client assets at the end of the billing cycle instead of the average daily balance of the account; (2) including assets in the fee calculation, such as cash or cash equivalents, that were previously excluded; and 3) charging clients for a full billing period rather than prorating fees for clients that start or terminate accounts mid billing period. Maalouf

    A. cannot use end-of-cycle valuations, include cash equivalents, or charge full fees for a full billing cycle for partial cycle accounts.
    B.can change the valuation and fee calculation methodology as long as actual fees charged to clients are lower.
    C.must notify clients of the changes in the valuation and fee calculation methods.
    D.cannot change fundamental elements of the client relationship, such as valuation and fee calculation methodology, once it is disclosed to the client.

    ANALYSIS
    This case involves Standard V(B): Communication with Clients and Prospective Clients, which requires CFA Institute members and candidates to disclose to clients the basic format and general principles of the investment process. Advisory fees are a critical part of the investment management process. Developing and maintaining clear, frequent, and thorough communication with clients allows them to make well-informed decisions about their investments, including about whether to engage or retain an investment adviser. Any changes to the methods for valuing assets or calculating fees that are different from the process set out and agreed to by the client must be disclosed. It is improper to change fee calculation methodology without disclosure even if it results in lower fees. Using end-of-cycle valuations, including cash equivalents, or not pro-rating fees for newly acquired or terminated clients are possible methods for calculating fees as long as those policies are disclosed and agreed to by the client. It is also permissible to change valuation and methodology and fee calculation policies overtime for existing accounts. Maalouf and his firm can negotiate with their clients about changing the methods for calculating fees that were originally disclosed. So, the best answer is C, Maalouf must notify his clients of the changes in the valuation and fee calculation methods.
    This case is based on a recent US SEC Office of Compliance Inspections and Examinations Risk Alert.

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
  • Ethics in Practice: Good Advice to Move Retirement Funds?

    04 Jul 2018
    22
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 28)

    Urquhart is a financial planner for AKC, which runs a large network of financial planners. AKC compensates its planners based on the number of sales of AKC products. Urquhart advises a husband and wife to roll their retirement funds, which combined are worth $125,000, from one service provider into a single AKC investment fund that follows a large-cap equity strategy. Urquhart discloses to the couple that they will have to pay a penalty totaling $30,000 for closing their accounts, but they will make up this loss with better investment returns from the AKC product. Urquart’s actions are

    A. acceptable if the AKC product is suitable for the couple.
    B. unacceptable because he is promising a specific rate of return.
    C. acceptable because he fully disclosed the negative consequences of closing their accounts.
    D. unacceptable unless the performance history of the AKC product supports his statement about future returns.

    ANALYSIS
    This case involves CFA Institute Standard I(C): Misrepresentation, which states that CFA Institute members and candidates must not knowingly make any misrepresentation related to investment analysis, recommendations, or actions. This standard prohibits making any statements promising or guaranteeing a specific rate of return on volatile investments. Even if the AKC product is suitable for the couple, it is an equity-based investment that is inherently volatile. Urquhart cannot make promises about future returns, even if the historical performance return would have reached the performance goal. Although he fully discloses the negative consequences of transferring their assets to the AKC product, that disclosure does not mitigate the inappropriate statement about future expected returns. Therefore, the best answer is B. As an aside, this case also raises questions about whether advising the couple to take such a significant loss in their retirement savings would be in their best interest and whether Urquhart’s independence and objectivity is compromised because he is influenced to make such a recommendation by the compensation scheme of his employer.

    This case is based on details coming out of the current regulatory inquiry into the practices of financial services company AMP in Australia.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
     
  • Ethics in Practice: Conflict of Interest or Not?

    22 Jun 2018
    1
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 26)

    Joyce works as a research analyst at private equity firm. Her personal investments are managed by her brother Neville, who works as a financial adviser. One day over lunch, Joyce’s colleague, Roger, mentions to Joyce that he is looking for a financial adviser and asks Joyce who she uses to manage her investments. Joyce tells Roger that Neville is her investment adviser, but she does not disclose that Neville is her brother. After meeting with Neville, Roger hires him to manage his considerable assets. Neville regularly pays a €5,000 referral fee to his current clients who recommend new clients to his firm. Neville offers to pay his sister the €5,000 referral fee. Joyce was unaware of the potential referral fee and refuses to accept the money from her brother given their relationship. Did either Joyce or Neville violate the CFA Institute Standards of Professional Conduct?

    A. Neither Joyce or Neville violated the CFA Institute Standards of Professional Conduct.
    B. Only Joyce violated the CFA Institute Standards of Professional Conduct.
    C. Only Neville violated the CFA Institute Standards of Professional Conduct.
    D. Both Joyce and Neville violated the CFA Institute Standards of Professional Conduct.

    ANALYSIS
    This case potentially involves the CFA Institute standards related to conflicts of interest. Standard VI(A): Disclosure of Conflicts requires members to “make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with their duties to their clients, prospective clients, and employer.” Does either Joyce of Neville have a conflict they need to disclose to Roger?
    It is possible that Joyce is recommending Neville to Roger because he is a close family relation and not solely because of his abilities as an asset manager. But she could also not want Roger to feel pressured to hire Neville just because he is her brother. Also, the discussion between Joyce and Roger is personal rather than professional in nature. Roger is not a client or potential client for Joyce, but rather they are just colleagues having a friendly discussion over lunch. Roger is not seeking investment advice. But even though Joyce’s actions in this particular scenario do not violate Standard IV(A), it may be prudent for Joyce to make such a disclosure at the outset. If Roger learns of the brother–sister relationship, he may feel that Joyce withheld important information from him. She could potentially still find herself on the receiving end of a complaint, especially if things later sour between Neville and Roger. One would hope that, in the interests of transparency and to promote her personal relationship with a colleague, Joyce would let Roger know that Neville is her brother.
    As for Neville, there is no required disclosure to Roger under Standard VI(A) because the fact that Roger was referred to Neville by his sister does not present a discernible conflict on the part of Neville. Another thing to look at is Standard VI(C): Disclosure of Conflicts – Referral Fees. This standard requires members “to disclose to their employer, clients, and prospective clients any compensation, consideration, or benefit received from or paid to others for the recommendation for products of services.” The facts indicate that Neville had a referral fee arrangement in place for his current clients when they referred his services to others. But in this particular case, Neville’s sister Joyce was unaware of the potential payment and turned down the referral fee when it was offered. So, Joyce was not influenced by a potential referral fee arrangement. If Neville had paid the referral fee to Joyce, he would have had to disclose this fact to Roger. But because no fee was paid, Standard VI(C) is not implicated.
    As a result, the best answer is choice A, which is that neither Joyce nor Neville violated the CFA Institute Standards of Professional Conduct.

    Facts for this case were supplied by Tanuj Kholsa, CFA, CAIA.

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org
  • Ethics in Practice: Material and Nonpublic Info or Not? 

    11 Jun 2018
    186
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 25)


    Robles, a fund manager, visits the main manufacturing plant of a large international cement company. During his visit, the management of the company discloses that the company has purchased additional land and resources at this location that can easily be put to use for low-cost expansion in the future. Management claims that the expansion would result in a capital cost per unit of production nearly 30% cheaper than industry norms. Management tells Robles “confidentially” that the company may consider expansion when the global economic climate improves sufficiently to boost demand for their product. Based on this information, Robles buys stock in the cement company for the fund he manages. Did Robles act unethically? Choose your response and join the conversation to explain your choice.

                         A. Yes because Robles traded based on material nonpublic information.
                         B. No because Robles did not trade on material nonpublic information

    ANALYSIS
    CFA Institute Standard II(A): Material Nonpublic Information prohibits members who are in possession of material nonpublic information that could affect the value of an investment from acting on that information. Information is material if it would significantly alter the total mix of information currently available in such a way that the price of the security would be affected. The nature, specificity, exclusivity, and reliability of the source of the information helps determine materiality. Information is nonpublic until it has been disseminated or is available to the marketplace in general. There are three pieces of information that are described in the case that are relevant to Robles’s decision to trade: (1) the purchase of excess land and resources at the site of the company’s main plant, (2) the calculation that using this additional capacity would reduce the company’s production costs to less than industry norms, and (3) the company’s expansion plans. Are any of these three pieces of information material nonpublic information?
    The first piece of information about acquiring additional production assets would likely be considered material. But it is not clear when the purchase occurred. Was it recent? Is the purchase in the public record? It is possible that the purchase is already publicly known, and the management’s disclosure to Robles is nothing new. It is also possible that the purchase just occurred or is imminent and has not been announced publicly, which would make the information nonpublic. The second piece of information about being to produce at much lower costs would be material information. But it is unclear whether this information is known only to the company. Certainly, confidential proprietary manufacturing cost calculations would be nonpublic, but astute analysts with knowledge of the industry may be able to easily make this type of evaluation. In that case, the information may not be confidential. Finally the third piece about the company’s expansion plans are very likely to affect the price of the company’s stock and would thus be material information. But again, the information is not specific enough. Management tells Robles that the company “may consider” expansion when the global economic conditions “improve sufficiently.” The possibility that the company “may consider” expanding is vague and ambiguous. When the economy “improves sufficiently” is also subjective and indefinite. Even if this information is disclosed “confidentially” only to Robles and is not publicly available, it is not clear that general plans about possible expansion at some unknown point in the future rises to the level of material information.
    In sum, a portion of the information disclosed to Robles by company management has the potential to be material. It is unclear from the facts of the case that the information is nonpublic. An argument could be made either way. We would need more information to make a determination about whether Robles violated the prohibition against trading on material nonpublic information.

    The facts for this case were submitted by Shreenivas Kunte, CFA Institute Director of Continuing Education and Advocacy, India, Asia-Pacific Region.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Capitalizing on Tax Benefits is OK, Right?

    31 May 2018
    1
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 24)


    Marte is an asset manager in Puerto Rico, a US territory. Residents of Puerto Rico receive significant tax advantages by investing in local securities. To capitalize on this advantage, Marte’s firm offers clients shares in a closed-end investment fund, organized under Puerto Rico’s financial laws and regulations, that holds at least 67% local securities and is permitted to borrow against up to 50% of its assets. The fund is usually leveraged to the extent legally permitted. Many of Marte’s clients have a modest net worth and conservative or moderate investment objectives. Marte convinces them to invest 85% or more of their assets in shares of the closed-end fund. Marte’s actions are

                     A. appropriate because they take advantage of the fund’s unique tax benefits for his clients.
                     B. inappropriate because the fund uses leverage to boost returns.
                     C. appropriate as long as Marte fully discloses the risks and benefits of the fund to his clients.
    ​                 D. inappropriate because the fund is an unsuitable investment for his retail clients.

    ANALYSIS

    CFA Institute Standard III(C): Suitability states that CFA Institute members and candidates in an advisory relationship with clients must “determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making investment recommendations or taking investment action.” In this case, given the favorable tax advantages of the investment vehicle, investment in shares of the closed-end fund may be suitable and appropriate for his clients at some level. In addition, the fund’s use of leverage may not be inappropriate or make the investment unsuitable. That said, Marte should always fully disclose the risks and benefits of his recommendations to his clients.
    But choice D is actually the best response. Given the financial circumstances and investment objectives of his clients, the high concentration of the fund’s shares in his clients’ accounts combined with the leverage make the weighty investment in the fund unsuitable. Despite the favorable tax advantages, highly concentrated clients bear the increased risk that a single market event affecting the value of the fund’s shares would significantly decrease their total account value. This risk is exacerbated by the fact that the closed-end fund is internally leveraged, which could magnify the fund’s loss during a market event that causes share values to drop steeply.

    This case is based on FINRA enforcement action from 2015.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.

     
  • Ethics in Practice:  Leaving Firm and Telling People Why!

    17 May 2018
    719
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.
    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 23)

    Nickoli is an investment counselor with HHI Capital Management. A colleague at her local CFA Society encourages Nickoli to leave HHI and join her at Vesuvius Asset Advisers. Nickoli eventually agrees and determines to leave at the beginning of the new year. Over the course of a few weeks prior to tendering her resignation, she mentions to her clients that they will likely be working with a new investment counselor in the new year because she will be leaving HHI in the coming weeks. Her clients express their surprise, and when pressed for details about why she is leaving, Nickoli shares that she is frustrated by and disagrees with the structure and direction of the firm, she disagrees with and does not have confidence in the current leadership, she does not believe the firm will be able to attract and retain good people, and other HHI employees have been mistreated and will also be leaving soon. Several of Nickoli’s clients indicate that they would like information about Vesuvius and may be interested in switching their accounts. After submitting her resignation, Nickoli immediately relays the names of those clients to Vesuvius, and after the first of the year, she begins soliciting them to transfer their accounts from HHI to her new firm. Nickoli’s conduct is
    1. acceptable because she is looking out for her clients’ best interest and believes Vesuvius provides better service.
    2. acceptable because she provides her opinion of HHI in response to questions from clients.
    3. acceptable because she did not solicit clients until after she left HHI.
    4. unacceptable because she made disparaging remarks about HHI to clients while she was still with the firm.
    ANALYSIS
    Answer D is the best response because this case relates to CFA Institute Standard IV(A): Duty to Employer – Loyalty, which states that CFA Institute members and candidates “must act for the benefit of their employer and not…otherwise cause harm to their employer.” Although a departing employee is generally free to make arrangements or preparations to change firms before terminating the relationship, those preparations must not conflict with the employee’s continuing duty to act in the best interests of the current employer and not otherwise undermine, disparage, or cause harm to the current employer. In this case, Nickoli decided to leave HHI and join Vesuvius several weeks before she submitted her resignation and notified the firm. During that time, Standard IV(A) obligated her to continue to act in the employer’s best interest and not engage in any activities that would conflict with this duty until her resignation became effective. Nickoli violated her duty of loyalty to HHI by making disparaging and harmful statements about the firm to its clients in the weeks prior to submitting her resignation and by promoting Vesuvius to HHI clients while she was still employed by HHI. Although she did not make actual solicitations until after she left HHI, Nickoli used the final weeks of her employment with HHI to contact and gauge which of the firm’s clients may be interested in receiving information about Vesuvius and possibly transferring their accounts from HHI. And although an investment professional should protect the client’s best interest, even if Nickoli believes the clients will be better off with her at Vesuvius, the clients’ relationship is with HHI. She is a representative of HHI, so she cannot malign the firm while still employed, even in response to questions.

    This case is based on a disciplinary case handled by the CFA Institute Professional Conduct group. The member in question received a Private Censure.
     
    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Doing Enough to Protect Clients?

    04 May 2018
    199
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 22)

    Giddings is responsible for compliance at GWH, a large broker/dealer and investment adviser. In connection with GWH’s wealth management business, the company maintains the personally identifiable information (names, addresses, phone numbers, account numbers, balances, and holdings) of hundreds of clients. Giddings adopted a number of policies and restrictions, including a Code of Conduct, that address employees’ access to and handling of this confidential information. Marsh, who works for GWH as a client service associate, downloads client data to his personal server located at his residence to facilitate his telecommuting. Marsh’s server is hacked and portions of the personal client information downloaded by Marsh are posted for sale on the internet. Did either Marsh or Giddings violate the CFA Institute Standards of Professional Conduct with respect to confidentiality? Join the conversation to tell us what you think and why.
    1. Marsh violated the CFA Institute Standards of Professional Conduct.
    2. Marsh did not violate the CFA Institute Standards of Professional Conduct.
    3. Giddings violated the CFA Institute Standards of Professional Conduct.
    4. Giddings did not violate the CFA Institute Standards of Professional Conduct.
    ANALYSIS
    CFA Institute Professional Standard III(E): Preservation of Confidentiality requires that CFA Institute members and candidates keep information about current, former, and prospective clients confidential unless the information concerns illegal activities, disclosure is required by law, or the client permits disclosure. Although Standard III(E) does not require investment professionals to become experts in information security technology, they must make reasonable efforts to ensure that communication methods and compliance procedures follow practices designed to prevent accidental distribution of confidential information. In this case, the facts presented do not provide enough information to determine whether Marsh or Giddings acted inappropriately to allow confidential GWH client information to end up for sale on the internet.
    As you think about your answer choice, there are two main questions that need to be addressed. The first issue is whether Marsh had permission to download client data to his personal server. If he did not, his misappropriation of client information for his own purposes constitutes a violation of Standard III(E). Even if he was not responsible for the distribution of the information, his misconduct facilitated the publication of the information. If Marsh did have permission from GWH to download and use the information from home, the second issue is whether Giddings adopted sufficient compliance policies and procedures reasonably designed to protect client information.
    As the compliance officer, Giddings is charged with ensuring the confidentiality of customer information by protecting against any anticipated threats or hazards to the security or integrity of the records. Giddings and GWH must work to protect against unauthorized access or use of client information that could result in substantial harm to clients. Although the facts state that GWH policies and Code of Conduct restricted access and handling of client information, the nature and extent of those safeguards are not provided. The fact that client information was able to be accessed and published calls into question the effectiveness of Giddings compliance efforts. Even if the policies were sufficient, there appears to have been insufficient auditing and/or testing of the effectiveness of the safeguards to keep client information confidential.
    This case is based on a US SEC enforcement action from 2016.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
     
     
  • The Next Generation of Trust - In India, Investors are Confident and Trusting

    03 May 2018
    4171
    56

    While Indian investors are the most likely to say they trust financial services versus other markets surveyed, trust for the financial services sector declined in India since our 2016 survey.

    Indian investors surveyed were much more likely to have a financial adviser than those in other markets. Although trust is still the most important factor in choosing an adviser, retail investors are also strongly motivated by the desire for performance. They are also much more likely than the average investor around the world to recommend their adviser to others.

    The top two reasons Indian investors are likely to leave their financial adviser are underperformance and a lack of communication and responsiveness. Indian investors favor personalized products and technology, and they also place high importance on brand. In terms of building trust, adhering to a code of conduct has a great impact on trust in India. Professional credentials also play a significant role in increasing trust.
  • The Next Generation of Trust - Investor Trust in Financial Services in Singapore

    03 May 2018
    1493
    12

    Singapore-based investors expect their advisers to be ethical and well-informed. Almost half of investors in Singapore “completely trust or trust” the financial services sector. Investors in Singapore tend to be significantly younger than those in many other markets. This may partially explain higher trust levels, as younger investors globally are also more trusting of financial services. A majority of investors surveyed in Singapore work with financial advisers, and few investors in Singapore report that they are very confident in their own ability to make investment decisions.

    Some investors in Singapore may question adviser competence. Their primary investment concerns are “My financial adviser making recommendations that result in losses” and “Hiring an unscrupulous financial adviser.” Trust is the most important for investors in Singapore when hiring an adviser. Communication is extremely important to investors in Singapore, and lack of communication is the primary reason they would discontinue a relationship with a financial adviser, although more than half also cite underperformance as a reason for leaving.

    Investors seem to prefer technology solutions over people as a majority say in three years it will be more important to have technology tools to execute their own strategy rather than human advisers. However, when selecting an investment firm, a majority of investors are split between the importance of a “Brand I can trust” and “People I can count on.”

    Read more in the full Market Report PDF below
  • The Next Generation of Trust - People are Trusted More Than Technology in Australia

    03 May 2018
    2817
    24

    Retail investors in Australia are some of the most satisfied among those we surveyed. However, even though Australian investors feel the markets are fair, retail investors are much less likely to work with financial advisers than investors in other markets. Although investors are not very confident in their ability to make investment decisions, many still find little need for professional advice.

    By and large, Australian investors also think that advisory fee structures are fair. However, they have less interest in personalized products than investors in any other market included in the survey.

    As in most markets, trust is the most important factor in choosing an investment adviser. However, in Australia people are trusted more than technology. A firm’s brand is also less important than the competency of its employees, and Australians rely on brand less than investors globally.

    Surprisingly, given the overall level of satisfaction for their investment firms, trust is tested in times of crisis, and Australian retail investors are, on average, slightly less confident that their investment firms are prepared for another financial crisis.

    Read more in the full Market Report PDF below.
  • The Next Generation of Trust - Investor Trust in Financial Services in Hong Kong SAR, China

    03 May 2018
    1664
    11

    Hong Kong is one of three markets in our survey where trust in the financial services sector is declining. Investors in Hong Kong are highly motivated by returns, and they prioritize performance over trust as a factor in choosing an adviser. Well over half of investors would also terminate an advisory relationship for underperformance.

    Hong Kong investors also appear to be less pleased with their advisers, and fewer than 10% believe that advisers put client interests first. However, few investors in Hong Kong are very confident of their investment decision making, which may indicate why many prefer to invest with the help of financial advisers. Many investors are indifferent to using a robo-adviser and human advisers and in three years believe it will be more important to have technology tools to execute their own strategy rather than a human adviser.

    Investors in Hong Kong also place a high value on professional credentials, ongoing professional development, and firms that adhere to a voluntary code of conduct. When selecting an investment firm, the majority of investors prefer a “Brand I can trust” over “People I can count on.”

    Read more in the full Market Report PDF below

     

  • Ethics in Practice: Different Service for Different Clients?

    29 Apr 2018
    558
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 21)

    Korloff is a money manager for several clients. One of the clients, a pension fund, accounts for 35% of the assets under management at Korloff’s firm. The fund pays more management fees to the firm than any other client. The executive director of the pension fund has made it clear that, because of this dominant position, she expects Korloff to give the pension fund “enhanced service” service in the form of advance information on investment recommendations, priority position for initial public offerings, supplemental research reports on potential investments, and daily personal contact. Korloff should
    1. refuse to comply with the request.
    2. comply with the request only if his preferential treatment does not disadvantage other clients.
    3. comply with the request because the fund is such a large and important client.
    4. comply with the request because the fund is paying for the preferential treatment with the higher fees.
    ANALYSIS
    This case relates to Standard III(B): Fair Dealing, which states that CFA Institute members and candidates “must deal fairly and objective with all clients when providing investment analysis, making investment recommendations, and taking investment action.” Treating clients “fairly” means not favoring one client over another or discriminating against clients when disseminating investment recommendations or actions. Differentiated service to clients, in the form of personal, specialized, or in-depth service to clients who are willing to pay for premium service, is acceptable under the standard. Fair dealing also dictates that recommendations be distributed in way that all clients for whom the investment is appropriate for have a fair opportunity to act on the recommendation. Korloff may provide preferential treatment (reflecting the amount and level of fees paid by the pension fund) in the form of supplemental research and daily contact to the pension fund without disadvantaging other clients.
    But different levels of service cannot disadvantage or negatively affect other clients and should be disclosed and made available to all clients and potential clients. So, in this case, providing “enhanced service” to the pension fund is acceptable as long as the preferential treatment does not disadvantage other clients and it has been disclosed to them that they can also receive enhanced service along with the pension fund. Two aspects of the request — providing advanced recommendations to the fund and giving the fund priority position for initial public offerings — would disadvantage other clients by systematically benefiting the pension fund at the expense of other clients. With all of this in mind, choice B is the best response.
     
    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
     
  • Capital Formation - Call for Information

    28 Apr 2018
    10740
    0

    In this call for information, we are asking you to share your knowledge of your local market and region, and the issues surrounding public vs. private capital formation.
  • Presentation Deck of the SIDC - CFA Society Malaysia ARX Seminar - 'Future State of The Investment Profession"

    27 Apr 2018
    425
    31

    The Future State of the Investment Profession (FSIP) study released by CFA Institute describes an industry at an existential crossroads. It warns that investment industry leaders who fail to transform their business models may jeopardize the future of their firms. To "future proof" themselves, FSIP provides a series of planning scenarios that combine magatrends that impact all industries with forces specific to the investment industry. These scenarios can be used as tools for leaders to steer the future of their businesses and ultimately improve outcomes for investors.
    Among the megatrends identified are technological advances, redefined client preferences, new macroeconomic conditions, different regulatory regimes reflecting geopolitical changes, and demographic shifts.
     
    More insights can be found in the attached presentation deck.
  • Ethics in Practice: Is It OK to Just Quietly Fix Error in Model?

    19 Apr 2018
    35
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 20)

    Roger Foss is an institutional money manager specializing in a quantitative investment strategy. He developed his own quantitative model that he uses exclusively as the investment decision-making tool for client accounts. Foss heavily markets his “comprehensive and exclusive” model to clients and prospective clients as being an effective tool to manage risk. After using the model for several years, Foss discovers an error that inadvertently eliminated one of the key components for managing risk, leading to underperformance as a result of industry overexposure. During that time, several clients raised questions about their portfolio performance, but Foss attributed it to market volatility. Foss revises the model to address the error and begins to promote his “new and improved exclusive and comprehensive quantitative model.” Foss’s conduct is
    1. unacceptable because the original model resulted in underperformance.
    2. acceptable because factors in quantitative models are proprietary and do not need to be disclosed.
    3. unacceptable because he failed to disclose the error in the model and its impact on client performance.
    4. acceptable because Foss corrected the error and uses the new model.
    ANALYSIS
    This case involves CFA Institute Standard I(C): Misrepresentation, which states that CFA Institute members and candidates must not knowingly make any misrepresentation relating to investment analysis, recommendations, or actions. A misrepresentation is any untrue statement or omission of fact that is otherwise false or misleading. Although investment professionals are not required to divulge the proprietary elements of their investment decision-making model, they are prohibited from making statements about the model that are not true. In this case, Foss claimed that his “comprehensive model” would effectively manage risk while at the same time, because of an error, the model omitted a key factor for managing risk. Foss also made misrepresentations to clients by failing to disclose the error and its impact on performance and attributing the model’s underperformance to market volatility rather than the error. Correcting the error and using a new model does not address the misrepresentations. Underperforming the market or benchmark is not necessarily of indicative unethical behavior. But the fact that the original model did not effectively manage risk and led to underperformance also may lead to a violation of the CFA Institute Standard — Diligence and Reasonable Basis requiring CFA members to exercise diligence and thoroughness in analyzing investments and taking investment action. Choice C is the best response.

    This case is based on a US SEC enforcement action.
     
     
    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Designation Is Like a Degree, Right?

    12 Apr 2018
    911
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 19)

    Bilal Ahmed recently earned his CFA designation and joined a medium-sized hedge fund as a senior analyst. His supervisor, Elizabeth Bennett, the founder of the firm, earned her CFA designation 10 years ago. But she has not paid her CFA Institute membership dues for the past four years and no longer participates in the organization’s continuing education program. Bennett uses the CFA designation on her business card and on all the marketing materials for the fund. When Ahmed asks Bennett about her using the designation, Bennett tells him that since she passed the exam and earned the charter, the credential is similar to a degree from university that cannot be taken away. Later, during a marketing pitch by Ahmed and Bennett to a potential investor, the investor notes that he has narrowed down his manager search to firms that only employ CFA charterholders in senior positions. He asks Bennett if everyone in the firm on the investment side is a CFA charterholder. Bennett responds “Yes, that is correct.” Ahmed does not respond. Did either Ahmed or Bennett violate the CFA Institute Standards of Professional Conduct? Join the conversation to let us know your answer and why you chose it.
    1. Ahmed violated the CFA Institute Standards of Professional Conduct.
    2. Ahmed did not violate the CFA Institute Standards of Professional Conduct.
    3. Bennett violated the CFA Institute Standards of Professional Conduct.
    4. Bennett did not violate the CFA Institute Standards of Professional Conduct.
    ANALYSIS
    This case relates to CFA Institute Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program, which states that when referring to the CFA designation, CFA Institute members and candidates “must not misrepresent … holding the designation.” The CFA designation is unlike a degree from university in that once granted the right to use the designation, individuals must also satisfy CFA Institute membership requirements (including paying dues) to maintain the right to refer to themselves as CFA charterholders. Although Bennett earned her charter, her membership is considered lapsed because she has not been paying dues to CFA Institute. Until her membership is reactivated, she must not present herself as a charterholder, and by continuing to use the CFA designation and representing herself as a charterholder to a potential client, Bennett has violated Standard VII(B).
    Participation in the CFA Institute Continuing Education Program is not mandatory for maintaining your designation, but it is encouraged as a way to meet the CFA Institute Code of Ethics provision that calls for members to maintain and improve their professional competence. Ahmed hears Bennett refer to herself as a charterholder, but knows that Bennett’s CFA Institute membership has lapsed. Standard I(A): Knowledge of the Law prohibits members from knowingly participating or assisting in the violations of others and requires members to dissociate from any unethical or illegal conduct. The issue for Ahmed is whether his acquiescence and silence in the face of Bennett’s misrepresentation rises to the level of assisting or participating in Bennet’s violation of the standard.
    It could be argued that Ahmed’s participation in a sales meeting in which he knows false information is given to a potential investor, and which could cause harm to that investor, constitutes assisting in the violations of those who provide that false information even if there is no active conduct by Ahmed. Best practice would be for Ahmed to address Bennett directly about her conduct and ask her to reinstate her membership or correct the statement made to the potential investor. If Bennett refuses to take corrective action, Ahmed could bring this conduct to the attention of the fund’s compliance department for them to address and dissociate from the activity by not participating in any additional sales meetings with Bennett.
    This case was written by Tanuj Khosla, CFA, CAIA
     

     Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: When Is Scrutinizing Risk Not Enough?

    05 Apr 2018
    124
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 18)

    Aaron Bouchard is a portfolio manager with discretionary control over the portfolios of more than 400 clients. Bouchard pursues a “medium risk, value” strategy for his clients, and they hire him on that basis. After scrutinizing the risk of potential investments, he makes a risk assessment for each of the securities he recommends based on the risks facing the issuer’s business. The majority of securities Bouchard invests his clients’ assets in are small-cap companies in the oil and gas sector and in commodities that he considers “medium” risk. As a result, Bouchard’s client accounts are concentrated in those sectors. Bouchard’s actions are
    1. acceptable if he discloses his investment strategy to his clients.
    2. unacceptable because he does not exercise diligence and thoroughness in executing his investment strategy.
    3. acceptable if he maintains appropriate records to support his investment recommendations and actions.
    4. unacceptable because he does not have a reasonable and adequate basis to support his investment recommendations and actions.
    ANALYSIS
    This case involves CFA Institute Standard V(A): Diligence and Reasonable Basis, which states that members and candidates “must exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.” Under this standard, members must also “have a reasonable and adequate basis, supported by appropriate research and investigation” for making investment recommendations and taking investment action. In this case, there is nothing to indicate that Bouchard’s investigation and analysis of the individual securities that he chooses for his clients’ accounts is insufficient or inadequate. The facts state that he “scrutinizes” the risk of potential investment on an individual basis. But in making the investment decisions, he does not appear to exercise diligence or thoroughness because he does not give sufficient weight to factors that go beyond long-term risk of the individual securities themselves. Bouchard does not consider such factors as security concentration in client portfolios, price volatility in the short term, or liquidity risk. Without considering all these factors in their entirety, Bouchard’s actions underweight the risk of the securities, likely making them a more risky investment for his clients than the “medium” risk that he has assigned. Because he does not exercise diligence and thoroughness when implementing his investment strategy, disclosing his strategy to his clients or maintaining adequate records for a faulty strategy will not cure the misconduct. In this case, the best choice is B.

     Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.


     
  • Ethics in Practice: Stick to IPS during Volatile Markets?

    03 Apr 2018
    189
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 17)
    Barry Van Wagenen manages the portfolios of high-net-worth clients. He completes an individualized IPS for each client when opening their account. He then develops a personal asset allocation formula based on each client’s risk tolerance, financial goals, and so forth. Over the past two days, the domestic and global equity securities markets fell more than 6%. Fearing a continued drop in the markets, Van Wagenen liquidates his personal investments and moves to cash until the financial markets stabilize. But he keeps his clients’ portfolios fully invested pursuant to the directives in their IPS. Van Wagenen’s actions are
    1. unacceptable because he is trading ahead of his clients for his personal account.
    2. unacceptable because his personal investment decisions do not match the investment recommendations he has made to his clients.
    3. unacceptable because he is not acting in a diligent and reasonable manner by leaving his clients assets fully invested in a rapidly declining securities market.
    4. acceptable because he is following his client’s directives, as detailed in their IPS, by keeping them fully invested.
    ANALYSIS
    The CFA Institute Ethical Decision-Making Framework provides guidance to investment professionals facing ethical dilemmas. The framework calls for identifying the ethical principle at issue, to whom a duty is owed, the relevant facts, and whether there is a conflict of interest to assist in choosing the appropriate course of conduct. In this case, we need more facts before we can properly analyze whether Van Wagenen’s actions are acceptable. Specifically, what level of investment discretion have Van Wagenen’s clients given him regarding investment decisions and whether the clients’ IPSs address how investment decisions are to be made in the face of rapidly changing market conditions. If Van Wagenen has full investment discretion, failing to adjust his client’s portfolio in a timely manner means Van Wagenen could be in violation of his duty to act with diligence and a reasonable basis — CFA Institute Standard V(A) — and in violation of his duty to his clients of loyalty, prudence, and care — CFA Institute Standard III(A). Similarly, if the IPS states that in the event of a significant market downturn, Van Wagenen has the authority to alter the agreed on asset allocation formula prior to formally revising the IPS, that would also be a strong indicator for Van Wagenen to take action. Under those circumstances, answer C would be the best choice. But if Van Wagenen has limited discretion or the IPS was silent about “emergency” powers to make changes in the portfolio, Van Wagenen’s hands may be tied (answer D). It is also not clear whether Van Wagenen acted diligently in attempting to contact his clients in the face of the volatile markets to determine whether they had any changes to their investment instructions. CFA Institute Standard VI(B): Priority of Transactions states that investment transactions of clients must have priority over personal transactions. This standard does not require that an investment professional’s personal investments match those of his clients because there may be differences in the risk tolerances, financial goals, and so on between the adviser and his or her clients (answer B). Finally, it is not clear that Van Wagenen is “front running” his client accounts because the price of the securities at issue may not be affected by the trades on his personal account (answer A).
    The facts for this case are not based on a particular case but reflective of current market volatility.
     

     Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • PRACTITIONER’S BRIEF: A SHOW OF APPRECIATION: WHY SOME FUND MANAGERS NEED THEIR INSTITUTIONAL BROKERS

    Joseph Wong    Rich Blake, Asjeet S. Lamba, PhD, CFA
    27 Mar 2018
    6357
    0

    Based on the paper “The Value of Institutional Brokerage Relationships: Evidence from the Collapse of Lehman Brothers” by Jianfeng Shen, Jerry T. Parwada, Kok Keng Siaw, and Eric K.M. Tan, available at https://www.arx.cfa/post/The-Valueof-Institutional-Brokerage-Relationships-nbsp-Evidence-From-The-Collapse-of-Lehman-Brothers-4536.html

    This paper was recently recognized for excellence by the CFA Institute Asia-Pacific Research Exchange (ARX) at the 7th Annual Financial Research Network (FIRN) Conference. FIRN is a network of finance researchers and PhD students across Australia and New Zealand.

    Institutional brokerage has always been a many-splendored thing. Analyst recommendations, IPO allocations, block order execution, networks for sourcing liquidity—these and other equity-trading–tied services were the lifeblood of Wall Street. Fund managers, via directed trades, lapped it all up and in return fed bank-owned brokers billions in commissions. Then came the Dodd–Frank Act, which led banks to scale back on capital-at-risk, and an even more dramatically disruptive trend: the rise of automated, or algorithmic, trading.

    Today, the interaction between money managers (“buy side”) and institutional brokers (“sell side”) is focused primarily on managers getting access to bank-run electronic trading venues known as “dark pools.” Though the institutional equity trading business has shrunk to a shell of its former self, an unshakable symbiosis remains between the two “sides.”

    One can never underestimate the intangible benefit of a longstanding, trusted relationship. And certain mutual fund managers may want to consider those benefits when deciding whether to dole out commissions or reel them in, according to Shen, Parwada, Siaw, and Tan, whose paper, “The Value of Institutional Brokerage Relationships: Evidence from the Collapse of Lehman Brothers,” is the subject of this ARX Practitioner’s Brief.

    “There is still much that we do not know about how fund managers’ performance is related to institutional brokers because it is difficult to measure relationship capital,” the authors write as they tee up their research work, which cleverly holds a mirror up to one question—“What do brokers really offer fund managers?”—by asking another instead: “How would a fund manager suffer if one of their trusted brokers suddenly was removed from the equation?

    WHAT’S THE INVESTMENT ISSUE?
    Although fund managers have become less reliant on sell-side research, billions in commissions
    still flow from fund managers to brokers. Analysts can’t offer the kind of insider intelligence that they once could (because of the US SEC’s Regulation Fair Disclosure), but information is still to be had, say, from a bank-facilitated meeting with a management team.

    The reality is there are thousands of stocks out there to be covered but only so many analysts a buy-side firm can afford to employ. Unavoidably, fund managers continue to steer trades to institutional brokers in exchange for a bundle of premium services, which may include research, execution, meetings, conferences, and a certain level of recognition on the part of fund managers that they can rely on their trading partners in a pinch. But does all of that translate into better investment performance? If not, what’s the point of having an institutional broker?

    HOW DO THE AUTHORS TACKLE THIS ISSUE?
    The collapse of Lehman Brothers on 15 September 2008 was the largest bankruptcy in US history. For the authors, it was the perfect setting to answer the question, “What happens to fund managers when one of their key brokers goes out of commission?” Using data from US SEC Form N-SAR (through which mutual funds disclose to whom trading commissions are paid), the authors identified more than 730 mutual fund clients of Lehman Brothers just before the crisis; they then compared that group’s performance over a 48-month period (September 2006 through August 2010) to 366 non-Lehman mutual fund clients.

    It is worth noting that Lehman’s brokerage arm did not instantaneously vanish in the collapse. The authors assert a causal impact on the Lehman mutual fund clients not from Lehman’s disappearance but rather from the severe disruption of its brokerage unit. Disrupted is one way to put it: the unit was liquidated and absorbed abruptly and chaotically into Barclays Capital. Trust evaporated. Of 25,000 employees, one-third were let go more or less immediately and another one-third left within two years. Still, one would think that certain key people were retained and to some degree some form of value was rendered. Besides, most fund managers had plenty of other brokers in their stables, and further, what value did brokers even provide in the first place?

    For fund managers, assessing the value added by their institutional brokers had long been a challenging exercise. Perceptions at the time of the Lehman collapse were largely that the value of such brokers had already diminished. And yet …

    WHAT ARE THE FINDINGS?
    The authors found that certain types of fund managers experienced a decrease in performance when Lehman became severely impaired. They pointed to monthly return lags averaging as much as 70 basis points per month relative to those fund managers who weren’t affected. Hardest hit were smaller firms that by design had exceedingly concentrated brokerage networks; also hurt were those firms that specialized in small-cap investments and thus were overly reliant on the deeper breadth of sell-side research. Put another way, these types of small/small-cap–focused firms were the ones extracting the most value from their broker relationships. Portfolio managers, especially smaller ones, strategically channeled a large portion of orders to a few brokers to get more bang for their commission bucks. And this reliance came at a risk. Damage to one key broker resulted in a reduction in alpha.

    WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
    Human capital shouldn’t be underestimated. Trusted brokers leverage myriad relationships built up over time to incalculable effect—sometimes you really don’t know what you’ve got until it’s gone. Downsizing doesn’t always pay dividends. It’s still important, particularly for small-in-size/small-cap–focused fund managers, to maintain close ties with institutional brokers. Although certain funds may resort to establishing new relationships, doing so involves significant switching costs and the forfeit of any relationship capital developed in the prior relationships. Overall, relationships still matter—perhaps to an ever-lessening degree in equities, but they still matter. Lehman’s collapse made for a fine experiment. But now, 10 years later, the authors’ findings, while surprising, nevertheless ring increasingly irrelevant with each passing day as more buying and selling occurs autonomously via algorithmic trading.

    The authors challenge their peers to take up similar research in fixed income, where trusted human capital remains truly valuable. The give-and-take between sell side and buy side in fixed income would seem exceptionally rife for further exploration. But that is another story.

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.
  • Ethics in Practice: Raising Capital with Digital Assets?

    22 Mar 2018
    149
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 16)
    Munchee is a US-based business that created an iPhone application (App) for users to review restaurants. The company initiated an initial coin offering (ICO) to sell digital tokens to raise $15 million in capital to invest in improving the App. The company advertised and promoted the offering on its website, in a white paper, and on social medial channels and message boards, such as Twitter and Facebook, particularly in forums aimed at those interested in investing in Bitcoin and other digital assets. In the communications about the offering, Munchee said it would use the proceeds to create an “ecosystem” in which the company, its App users, restaurants, and others could use the tokens to buy and sell goods and services. Munchee explained that it expects the tokens to increase in value as a result of the company’s efforts. In addition, increased participation in the ecosystem and the use, or “burning,” of tokens would also help increase the value of the tokens. Finally, Munchee stated that it intended for the tokens to trade on a secondary market. Munchee’s ICO was
    1. unacceptable because it promoted a virtual and highly speculative investment unsuitable for investors.
    2. unacceptable because it promoted the investment through social media, blog posts, and brief tweets that did not describe the significant limitations and risks associated with buying the tokens.
    3. unacceptable because the tokens were an unregistered security under US securities laws.
    4. acceptable.
    ANALYSIS 
    This case involves Standard I(A): Knowledge of the Law, which requires CFA Institute members to “comply with all applicable laws, rules, and regulations . . . governing their professional activities.” The fact that that the tokens are a virtual currency, highly speculative, and thus unsuitable for many investors does not make it unethical for Munchee to offer them as investments. Munchee is not an investment adviser but an investment issuer. It would be up to investors and their advisers to determine whether an investment was suitable for their portfolio. Similarly, from an ethical standpoint, Munchee is free to promote the tokens in a variety of ways as long as the company provides full and complete information about the investment, responds to inquiries from potential investors, and does not provide any fraudulent or misleading information about the tokens. Munchee can direct those who see brief promotional material about the tokens on social media to the company’s white paper that presumably contains full and complete information about the tokens. Again, it would be up to an investment adviser, not the issuer, to describe the significant limitations and risks associated with buying the tokens from an investor’s perspective.
    This case turns on whether the tokens are a security and thus need to be registered according to the US securities laws (US law would applicable because Munchee is a US-based company selling the products in the United States). In its 11 December 2017 cease-and-desist order against Munchee, the US SEC declared that the tokens were securities as defined by Section 2(a)(1) of the Securities Act and must be registered. According to the test applied by the SEC, a product is a security if it involves the investment of money in a common enterprise with a reasonable expectation of profits that are derived from the entrepreneurial or managerial efforts of others. Upon being contacted by the SEC, the company immediately canceled the sale and refunded the money of buyers who had bought tokens. Because of this prompt action and Munchee’s cooperation, the SEC imposed no additional sanctions. In this case, the best answer is C because Munchee is a US company that violated US Securities laws. The laws of another jurisdiction may not require registration of this type of virtual currency as a security. In that case, answer A could be appropriate.

     Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
     

     

     
     
  • Ethics in Practice: Just Protecting Client’s Assets.

    15 Mar 2018
    27
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 15)
    Mary Mwangi’s firm offered its clients several different insurance products. Three of Mwangi’s clients initially purchased one type of product (Class A), but later changed their mind and asked to swap the product for another, less expensive type (Class B). To complete the transaction, the law required the clients to execute new sale and purchase documents for the Class B product. The clients wanted to sign the necessary documents at the time they met with Mwangi to switch to Class B, but the documents were not ready. Mwangi advised her clients to wait until all of the paperwork was complete. But when the time came to complete the transaction, Mwangi was unsuccessful in reaching the clients for their signatures. Without the signatures, Mwangi’s firm threatened to cancel the swap, which because of other investment purchases, would have placed the clients’ accounts into an overdraft position. Under the firm’s policies, such shortfalls were to be covered by selling account assets once the debit had been outstanding for two weeks. To keep this from happening, Mwangi forged the clients’ signatures on the necessary documents to put the swap into effect. Mwangi’s actions were
    1. unacceptable.
    2. acceptable because the clients had already given their permission for the swap.
    3. acceptable with approval from her supervisor.
    4. acceptable if the clients gave her explicit permission to sign the documents on their behalf.
    ANALYSIS
    This case involves Standard I(A): Knowledge of the Law, which requires CFA Institute members to “comply with all applicable laws, rules, and regulations … governing their professional activities.” To complete the swap from the Class A to the Class B product, Mwangi’s clients were legally required to execute new sale and purchase documents, which did not happen because Mwangi forged their signatures. General approval of the transaction by the clients is insufficient to meet the legal requirement for client signatures. Obviously, approval of a supervisor to engage in illegal activities does not relieve Mwangi of her obligation to follow the law. Finally, even if the clients fully understand the circumstances and explicitly approve of Mwangi signing the forms on their behalf, the law requires that actual signatures of the clients must be on the documents. While the intent of the law is meant to protect the clients and the clients are waiving their rights, that still does not allow Mwangi to circumvent the legal requirements. The best response is A.

    This case is based on a disciplinary action by the CFA Institute Professional Conduct Program. Before this incident, the member had an unblemished career in financial services for more than 15 years. The firm confronted the member about the forgeries and she readily admitted what she had done. The member was terminated by her employer for cause and they reported her to the regulatory body. The regulator determined that the member had engaged in conduct unbecoming or detrimental to the public interest and in violation of the regulatory body’s member rules. She was suspended and  fined. CFA Institute investigated and imposed a Nine-Month Suspension on the member for violation of Standard I(A): Knowledge of the Law and Standard I(C): Misrepresentation.

     
  • Ethics in Practice: Keep Up Your Ethical Exercise! 

    14 Mar 2018
    142
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 2)
    Elizabeth is an investment manager at a wealth management firm with high-net-worth clients. When Elizabeth was hired a few years ago, her sister opened an investment account with the firm. Elizabeth has decided to leave the firm to set up her own boutique hedge fund with her colleagues. She asks her sister to close her existing account and put that money in the new hedge fund. Elizabeth’s request is:

    Answer Choices
    1. Acceptable since she has no obligation to keep her sister’s account at the wealth management firm.
    2. Unacceptable because she should not solicit her employer’s client to join the new fund.
    3. Unacceptable if she signed a non-compete agreement with her employer.
    4. Unacceptable if her hedge fund strategy is not suitable to her sister.
    Analysis
    The main ethical principle at issue in this case is Duty to Employer.  CFA Institute Standard IV(A): Duty to Employer – Loyalty, states that members “must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities” and must not “cause harm to their employer.”  In this case, Elizabeth could potentially cause harm to her employer by causing her sister to move her assets away from the wealth management advisor.  But this case also highlights a key element of the CFA Institute Ethical-Decision-Making Framework – to identify relevant facts before choosing a course of action.  Sometimes not all the relevant facts are known.  Is Elizabeth still working for her employer when she asks her sister to leave the firm?  The facts are not clear.  If so, her actions are unacceptable because she would be causing harm to her employer (choice B).  The fact that the client is a close relation is irrelevant, Elizabeth’s sister is still a client of the firm. If Elizabeth is no longer employed by the wealth manager advisor, soliciting former clients may not pose a problem.  But if she has left, does Elizabeth have a non-compete agreement with her employer prohibiting her from soliciting clients of her employer?  If so, she would be prohibited from soliciting clients, including her sister, to the new hedge fund.  Choice D brings up the issue of suitability of investments.  Even if Elizabeth has already left the firm and a non-compete agreement is not in force, she should only be soliciting clients for whom the investment is suitable under Standard III(C): Suitability which states that members must “determine than an investment is suitable to the client’s financial situation” before making a recommendation or taking action. Is the hedge fund a suitable investment for Elizabeth’s sister? The question doesn’t provide any clues. Even if the hedge fund is a suitable investment, Choice D still does not address the main issue of whether Elizabeth his harming her employer.  There may be no “obligation” to keep her sister’s investments at the wealth management firm (Choice A), but depending on the facts, it would be unethical for her to do so.  Properly applying the Ethical Decision-Making Framework calls for identifying the relevant facts.  All the choices could be correct, depending on facts that are not provided in the question.  We need to know more.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Developing Your Ethical Decision-Making Skills

    14 Mar 2018
    98
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 1)
    David, an analyst for an asset management firm, attends a presentation for securities analysts at the headquarters of a manufacturing company. The analysts are very impressed with the presentation and ask the CEO many questions. After the meeting, the Head of Investor Relations invites all analysts to a club house for dinner and karaoke. Most of other analysts accept the invitation. Of the choices below, what do you believe David should do?

    Answer Choices
    1. Accept the invitation.
    2. Accept the dinner but not karaoke.
    3. Accept the invitation but disclose the invitation to his supervisor.
    4. Reject the invitation.
    Analysis
    The ethical principle at issue in this case is independence and objectivity.  The question turns on whether David compromises his independence and objectivity as an analyst by accepting an invitation to dinner and karaoke from representatives of the manufacturing company that he is researching. CFA Institute professional conduct Standard I(B) states that CFA Institute members “must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities” and must not “accept any gift, benefit…or consideration that reasonably could be expected to compromise their…independence and objectivity.” So, would dinner and a night of karaoke reasonably be expected to compromise David’s independence and objectivity? The appropriate course of action turns on how extravagant the benefit might be.  Modest gifts and entertainment in the ordinary course of sociable business interaction may be unlikely to sway an analyst’s opinion.
    Choice A assumes that the dinner and karaoke is not extravagant and would have no impact on David’s opinion of the company. But we need more facts to ensure that is the case. Cultural context should also be considered when making a decision. Dinner and karaoke may be modest and tame in some cultures but more extensive and extravagant in other settings. Awareness of cultural sensitivities and expectations are very important, especially for those who may be working outside of their familiar home region. Choice B attempts to steer a middle ground by having David only accept part of the entertainment, which may lessen the threat of a compromised analysis by reducing the benefit. In practice, this may be awkward to do and the dinner itself could still be extravagant. Choice C also attempts to compromise by suggesting David could accept the dinner/entertainment as long as the gift/benefit is disclosed to the employer, seemingly mitigating the potentially problematic conflict of interest. But for disclosure to be effective it must be adequate. There is no indication that David will disclose the benefit to the clients who will read David’s research report. They will therefore have no indication that the analyst writing the report was given a nice dinner and potentially fun-filled night on the town by the subject of the report. Best practice would suggest that David reject the invitation (Choice D) to avoid any question about his honesty and integrity.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
     
     
  • Ethics in Practice: Side Job in a Comedy Club is Fine, Right?

    08 Mar 2018
    101
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 15)
    Gary Stansfield, CFA, works as a portfolio manager at Pitt Asset Management (PAM) based in New York. He has been actively involved with theatre since his college days and performs occasionally as a stand-up comedian at a comedy club after work hours. He is not compensated for his performances, but he is hoping to leave his job to launch an entertainment career. Audience members often show their appreciation for Stansfield’s act by giving him nominal tips. One night, Elaine Bennet, a broker at Newman Brokers, a firm that PAM often trades with and in sizeable volumes, stops at the comedy club with a group of friends while Stansfield is performing. Bennet and her friends thoroughly enjoy Stansfield’s comic routine and, as a token of appreciation, the group tips him $5,000. Stansfield should
    1. accept the money and thank Bennet and her friends for their generosity.
    2. accept the money but disclose it to his supervisor at PAM.
    3. accept the money but seek approval from his supervisor before continuing to perform at the club if he anticipates further additional compensation.
    4. not accept the money but thank Bennet and her friends for their compliments on his performance.
    ANALYSIS 
    This case potentially involves violations of the CFA Institute standards related to independence and objectivity and/or conflicts of interest. If Stansfield accepts the tip, it could be construed as gift to influence his conduct because some may find it implausible that an audience member would give such a generous tip irrespective of how much he or she might have enjoyed the comic sketch. The large tip he receives from Bennet and her friends after they attend his performance could be seen as an attempt by Bennet to influence Stansfield’s/PAM’s choice of brokers. But a key step of the CFA Institute Ethical Decision-Making Framework asks those facing an ethical dilemma to identify relevant facts. A number of relevant facts need to be determined to make an informed decision about the appropriate course of action for Stansfield. Does Bennet know Stansfield and know that Stansfield works for PAM or are they strangers? Does Stansfield have decision-making authority in choosing brokers on behalf of PAM (and if so does Bennet know this) or is Stansfield not involved in the decision about which brokerage firm to use? Does Stansfield know Bennet and who she works for? Was the tip primarily from Bennet or did it represent a collection from the whole group of friends? Do her friends work at Newman as well? Is one of them particularly wealthy and generous with struggling new entertainers? Assuming that the tip came primarily from Bennet and she knew Stansfield worked at PAM and believed Stansfield to have influence over PAM’s brokerage decisions, and if Stansfield knew Bennet and who she worked for, then best practice would be for Stansfield to politely reject the tip because it could be perceived to influence his fairness and objectivity when allocating trades. Although the information is incomplete, with these assumptions, the best response would be D. In working at the comedy club, Stansfield did not violate Standard IV(B): Additional Compensation Arrangements, which states that CFA Institute members must not accept any “compensation… that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest” without written consent. Stansfield’s appearances at the comedy club did not interfere or compete with his day job at PAM, and he normally received tips that were minimal in value.


    This case is based on facts provided by Tanuj Khosla, CFA, CAIA
     
    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.

     
  • Ethics in Practice: Oh No! Accidental Facebook Post

    02 Mar 2018
    28
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 14)
    John Walsh, CFA, is the Chief Financial Officer of TrueTech Corporation, a leading semiconductor manufacturer in the United States. For the past few months, Walsh has led the TrueTech team in talks to buy a majority stake in Veridy Corporation, a smaller, privately owned semiconductor company that has a patented technology that could potentially cut the chip manufacturing costs of TrueTech by almost 40%. After intense negotiations, TrueTech is able to close the deal with Veridy late on a Friday night. Walsh wants to share the good news with his wife, so he takes out his phone and types “Finally! TrueTech has acquired a majority stake in Veridy. The deal is sealed!” But instead of sending the message to his wife, he accidentally posts it on his personal Facebook page. The next morning (a Saturday), he wakes up and discovers the blunder. Did Walsh violate any part of the CFA Institute Code of Ethics or Standards of Professional Conduct?
    1. No, this was an honest mistake.
    2. Yes, but Walsh does not need to do anything to rectify the matter because the posting was unintentional.
    3. Yes, Walsh should immediately disclose his actions to TrueTech and Veridy.
    4. Yes, Walsh should post the merger information on the company website and make a public announcement about the transaction.
    ANALYSIS
    This case is involves Standard IV(A): Duties to Employers – Loyalty, which states that CFA Institute members must not “divulge confidential information or otherwise cause harm to their employer.” Even though his action was unintentional, Walsh violated his duty of loyalty to his employer because he disclosed confidential information about TrueTech outside the company. The honest mistake does not exonerate him from violation. Walsh is also in danger of violating Standard II(A): Material Nonpublic Information, which states that CFA Institute members must “not act or cause others to act” on material nonpublic information. Walsh inadvertently leaked material nonpublic information to the select group of people who are his friends on Facebook. But there is no indication from the facts given that any of Walsh’s Facebook friends who received the merger information tried to take advantage of that information. Walsh should take steps to attempt to rectify his mistake. Although Walsh should notify TrueTech and Veridy of his error, that does not go far enough. The most appropriate course of action is for Walsh to publicly disseminate the news of the merger as quickly as possible so that the information is available to all investors. Answer D is the best choice.
    This case was written by Tanuj Khosla, CFA, CAIA, and the facts are not based on any particular case.
     

    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.
  • Ethics in Practice: Performance, Footnotes and Benchmarks.

    22 Feb 2018
    39
    0

    If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

    Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

    We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why by using the comment field below.

    CASE (Week 13)

    Howard Young is CEO, portfolio manager, and sole owner of Stewardship Investment Advisers (SIA), a registered investment adviser with more than $154 million assets under management and over 250 discretionary accounts. For several years, Young has distributed marketing materials to clients and potential clients that contain gross-of-fee performance for returns on SIA’s managed portfolios. Young believes that gross-of-fees calculations are the most relevant because management fees are negotiable and can vary by client. Young includes a footnote at the end of the brochure disclosing that advisory fees would have to be netted out to show actual performance. The marketing material also includes a table that compares percentage increases in the S&P 500 Index with percentage increases in SIA’s performance. SIA’s performance includes the reinvestment of dividends. Young believes that the S&P 500 is the most appropriate and understandable benchmark because it is commonly reported in the financial press and recognizable by his clients. Has Young engaged in misconduct by using gross-of-fee returns or showing the S&P 500 performance? Join the conversation and tell us what you believe is the correct answer and use the Ethical Decision-Making Framework to help explain your choice.
    1. Young is guilty of misconduct in showing gross-of-fee performance.
    2. Young is NOT guilty of misconduct in showing gross-of-fee performance.
    3. Young is guilty of misconduct in providing the S&P 500 as a benchmark.
    4. Young is NOT guilty of misconduct in providing the S&P 500 as a benchmark.
    ANALYSIS 
    This case involves the presentation of performance history. CFA Institute Standard III(D): Performance Presentation states that “when communicating investment performance information, members must make reasonable efforts to ensure that it is fair, accurate, and complete.” The goal is to provide credible performance information to clients and prospective clients and to avoid misstating performance or providing misleading performance information. Absent legal or regulatory provisions prohibiting such conduct, presenting gross-of-fee performance results is acceptable as long as there is clear disclosure that relevant fees must be deducted to get the actual performance history. It is unclear from the facts presented whether Young’s footnote is prominent or clear enough to be sufficient to meet this standard. Best practice would be to present both gross-of-fee and net-of-fee performance histories, or in some other way, prominently show the effect of the fees so that the performance information meets the “fair, accurate, and complete” requirement of Standard III(D).
    Similarly, presenting a table that includes the S&P 500 performance as a benchmark for returns may be appropriate under certain circumstances. But when it is used as a benchmark for firm performance history that includes reinvested dividends, as in this case, it would not be an “apples-to-apples” comparison and would likely be misleading because the S&P 500 performance history does not include reinvested dividends. If Young wants to use the commonly reported S&P 500 returns over time as his benchmark, he should ensure the SIA’s returns are calculated in a comparable way. At minimum, there should be prominent disclosures of any differences between the benchmark’s and the firm’s returns. It is unclear from the facts presented whether Young has made the necessary disclosures regarding the benchmark. So, to judge whether there has been any misconduct, a thorough examination of the presentation material would be necessary to determine whether Young is presenting performance that is fair, accurate, and complete or whether his presentation misstates performance and is misleading.


    Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.